Over the past few weeks, our views have become incrementally bullish. In our opinion, trends in the market make the stance of “neutral but nimble” the right one. Three trends that we are watching closely for further improvement are now at important inflection points. Should they shift from their current intermediate-term trajectory, the bulls would have added support for the current rally.
The Research by Potomac Regime Index
The RbP Regime Index is a custom indicator that we have created to track Intermarket themes across the equity, fixed income, and commodity markets. It gives us a sense of the current market environment in terms of risk appetite. The six-month slope highlights the intermediate-term trends as well as if it is accelerating or decelerating. The index has reached an inflection point as it tests resistance from below. Breaking this level would be a sign of increased risk appetite in the market and would be a bullish data point for equity investors.
The six-month slope remains negative, but the case can be made that the rate of decline has been decelerating. A move above the zero level would point to a shift in the trend. We are watching closely.
Utilities vs. the S&P 500
The Utilities sector is a well-known pocket of the market to which investors turn in times of stress. The ratio between Utilities and the S&P 500 rallied from last November to July of this year. It has not been able to make much/any upside progress since. The six-month slope turned positive in February bushes been losing upside momentum for the past two months. Bullish investors want to see this ratio moving lower, with confirmation from a negative slope.
Semiconductors vs. the S&P 500
The Semiconductor space has had a lot thrown at it of late. However, the ratio between the SOX and the S&P 500 has not broken down. Rather it is building a base on a support level as the six-month slope signals waning downside momentum. A rebound from current levels would add to the bullish case for risk assets.
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