The new year kicks off right where 2020 left off - with all four weekly signals in the risk-on position. It’s not necessarily full speed ahead, though, as some asset classes are showing signs of turning. The Treasury, utilities and REITs ratios have been consistently down for the past two months, but all three have recently turned flat or begun turning higher again.
The strength in small-caps and lumber are both confirming that investors are firmly adding risk right now, but the risk of mean reversion still exists. The $900 billion coronavirus relief package, which was officially signed Sunday night, emphasizes perhaps the biggest risk in the markets today - debt. I don’t expect a lot of activity this week, but January could bring about the beginning of a longer-term period of elevated volatility.
I think we may be approaching a period where caution may be warranted. With a new $900 billion government stimulus package apparently on the way, I feel the financial markets could be ready for a significant sentiment shift. The spiraling debt load and years of highly accommodative policy from the Fed come with negative long-term implications.