Weekly Risk Signals

While the signals remain unchanged from last week, the risk-off case slowly continues to build. Not only are bond yields soaring, high yield credit spreads look like they’re finally beginning to expand as well. If that trend continues, junk bonds likely have a steep fall ahead. If junk bonds fall off the cliff, stocks are probably falling too.

Both the utilities and lumber/gold signals turn risk-off this week with the latter not having done so since May. The one asset class that has yet to confirm is Treasuries. Despite clear indications that credit conditions are getting worse, the bond market seems to be giving no signal that it’s worried right now. If utilities continue to hold on to their strength and Treasuries suddenly begin to rip higher, I think we might be at the starting line of a broader market correction.

All four signals remain risk-on for another week, but we’re starting to see the overall balance tilt more towards neutral than bullish. This week’s August CPI report could prove to be another hindrance for Treasuries. Treasuries could very well find themselves under pressure again as the 10-year yield hovers near 15-year highs.