The title card for today's research, Risk-Off or Just a Pause, for June 18th research.

Key Points

  • The Credit Market is Not Sending Up a Red Flag
  • High Beta vs. Low Volatility Tests the 50-Day Moving Average
  • No Breakdown in the Discretionary/Staples Ratio
  • Copper and Lumber Reach Important Support vs. Gold
  • Growth Nears Resistance Relative to Value

Chart in Focus:

While Treasury yields have moved lower over the past few weeks, the credit market is not sending a warning signal just yet. The BofA Merrill Lynch US High Yield CCC or Below Option-Adjusted Spread, a measure of credit spreads, is in the process of breaking below support at the 2014 and 2018 lows. At the same time, the 14-day RSI is in an oversold position and has not been able to exit bearish ranges.

Key Themes and Relationships

We update our views on the key relationships that we track across the market to get a sense of investor’s willingness to take on risk. We also highlight the trends playing out in major factors such as Growth, Value, Large Cap, and Small Cap.

High Beta vs Low Volatility

The ratio of the S&P 500 High Beta Index relative to the S&P 500 Low Volatility Index has continued to fade from record levels as equities have come under pressure this week. The ratio is now testing the rising 50-day moving average while the 200-day moving average is well below current levels. During the recent high, the 14-day RSI failed to confirm, making a lower high. This divergence would be confirmed with a break of the April low and would bring the 200-day moving average into play.

Consumer Discretionary vs Consumer Staples (Equal Weight)

The ratio of Consumer Discretionary stocks relative to Consumer Staples stocks is stuck between the 50-day moving average and the 2018 highs. As we discussed last week, a break of support would likely target the rising 200-day moving average. The 14-day RSI is trying to consolidate after failing to confirm the high that was reached in April. However, this indicator has not become oversold during the current consolidation and is trading in the middle of the range.

For now, we are waiting for a break in the ratio, in either direction, to help determine investor’s risk appetite.

Copper vs Gold

The Copper/Gold ratio remains below the key resistance level that we have been highlighting and is now testing support at the pre-pandemic levels. The ratio is below the 50-day moving average, which is shifting from declining to flat. While the 14-day RSI has not yet become oversold, it has broken to the lowest levels since the strong uptrend began in the fourth quarter of last year. Holding support will be key for this ratio.

Lumber vs Gold

The Lumber/Gold ratio continued to decline this week, moving further below the 50-day moving average, which is turning lower. The ratio is now testing support at the 2018 high and the 200-day moving average. How this ratio reacts at support will be an important “tell” for risk appetite in the market. While support is being tested, the 14-day RSI has moved into an oversold position. If the ratio is going to make a stand, this would be a logical place to begin.

The themes below can show us where investors are allocating capital within the equity market.

Growth vs Value

The commodity weakness mentioned above has coincided with an unwind of positions in the cyclical/value areas of the equity market. This has led to a near-term rebound in Growth stocks relative to Value stocks. The Growth/Value ratio for the S&P 500 is now approaching the declining 200-day moving average from below after retaking the 50-day moving average. The 14-day RSI has moved into an overbought position. Breaking the 200-day moving average would be a signal that Growth is likely to regain its leadership position.

Small vs Large

The ratio of Small Caps to Large Caps continues to test price-based support and the 50-day moving average as it consolidates in the near-term. Should support give way, the rising 200-day moving average would likely be tested. The 14-day RSI is in the middle of the range, confirming the consolidation, but we note the series of higher lows. This is a logical level for Small Caps to begin to reassert a leadership position.


The biggest development in the market this week is the weakness in the commodity themes highlighted here. The Copper/Gold and Lumber/Gold ratios are now at support levels. If they are going to stage a rebound, these levels would be a good place to begin. Further weakness would likely lead to Growth regaining leadership vs. Value and Large Caps outperforming Small Caps. 

Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.