Weekly Risk Signals

While the opportunity for a melt-up remains intact, the probability of such has decreased substantially over the past week. The strong outperformance of both utilities and Treasuries combined with weakness in lumber is usually a fairly strong sign that conditions have turned less favorable in the short-term. The intermediate-term picture still looks optimistic.

Investors were looking for a reason to get bullish last week and they got it in the October inflation report. The thing that investors should be careful of here is getting too excited about one report. The short-term utilities signal flips to risk-on this week, helping to confirm more bullish short-term conditions.

I believe the set-up for a short-term melt up is still there, but conditions are certainly not quite as favorable as they were a week or two ago. There was a very distinct line drawn between what led last week and what didn’t. The midterm elections could be a positive catalyst for at least the first half of the week.