Weekly Risk Signals

The short-term signals are still indicating risk-on conditions, but we saw a potentially significant change in sentiment last week. Perhaps this was a result of the conflict in Israel, but some intermarket signals recently have been indicating that this was a possibility. We may have seen the advent of the one market behavior that I’ve been watching for that could indicate a broader risk-off pivot.

The markets had another week of high volatility in both Treasuries and utilities, a signal that risk assets could be positioned well in the near-term, but at heightened downside risk over the longer-term. Interest rates are still driving the market’s near-term direction. Shrinking Treasury yield spreads are worth keeping a very close eye on here because they’re coming very close to signaling an imminent recession.

While there’s a lot of volatility within each of the four risk signals, they remain structurally neutral for the most part. I think this volatility within the individual signals is that the markets are really trying to figure out what they believe here. We’re seeing that starting to manifest in high yield credit spreads and in the bond market, but it may still be in its early stages. Once we get a top in long-term Treasury yields, then perhaps we’ll start to see a consensus on signaling again.