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Investors Are Hungry For Risk

Technical Analysis Isn’t Just A Tool

Last week, I shared that technical analysis isn’t just a tool for me—it’s how I view the world. Rather than getting lost in endless hypotheticals about future recessions, wars, or market disruptions, I focus on price. Price reflects what people are actually doing in the market, not the narratives spun on TV. With election season upon us, it’s a perfect reminder that what people say and what they do are often worlds apart. I see the world through the lens of technical analysis, where actions speak louder than words—where I follow people’s feet, not their lips. So, while everyone loves to claim, “I’m cautious,” if you dig deeper, the reality screams, “I’m adding risk.”

What People Want vs. What People Need

One of my favorite ratios is the Consumer Discretionary to Consumer Staples ratio. It compares companies that sell products people want when they have disposable income to those that sell products people need, regardless of the business cycle. When investors anticipate an economic slowdown or seek less risk, this ratio tends to decline. On the flip side, as risk appetite grows, the ratio rises.

To get a more balanced view, analyzing this ratio on an equal-weight basis using RSPD and RSPS is helpful, as it reduces the outsized influence of individual stocks. For example, while XLY has 50 stocks, its top three holdings—AMZN, TSLA, and HD—make up around 45% of the total weight. Similarly, XLP’s top three, PG, COST, and WMT, account for 28% of the ETF’s weight, despite having 38 stocks.

As we can see, Investors are not “cautious” at the moment, in fact they are adding risk at an accelerating pace since the first rate cut. This doesn’t scream economic slowdown, this doesn’t scream “cautious”.

The Market of Stocks vs. The Market of Bonds

Another ratio I like to evaluate is Stocks vs. Bonds. If investors were truly as fearful of rate cuts, war in the Middle East, or government control over weather as media outlets suggest, savvy money managers would be shifting more heavily into bonds over stocks.

My goal with these to evaluate the market as a whole, rather than focusing on individual names. This provides a more comprehensive view of “the market of stocks vs. the market of bonds.” That’s why I use RSP, the equally-weighted S&P 500, for a more balanced representation. For the denominator, I chose TLT and IEF to capture different bond durations. You could also use SPAB and achieve similar results.

As you can see, the market of stocks is reaching all-time highs relative to the market of bonds-whether looking at 7-10 year durations or 20+ year durations. Not exactly the picture of fear that some would have you believe.

Cautious About Being Too Cautious

Price lets us cut through the noise, following actions instead of words. On TV, experts love to play it safe, repeating “I’m cautious” over and over, citing what they call “heightened risk” in the market. But when we look at the actual risk ratios, it becomes clear: many of these folks are more cautious about being too cautious than they are about taking on risk.

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Cheers!

-LT

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