Chart Advisor: Investors Warm Up to Risk

By J.C. Parets & All Star Charts

Friday, 27th January, 2023

1/ Investors Reach for Risk

2/ Financials Score Fresh Highs

3/ Don’t Fight Dr. Copper

4/ Is Uranium About to Go Nuclear?

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1/ Investors Reach for Risk

During a bull market, investors move further out on the risk curve in an effort to generate alpha, which refers to an investment’s ability to beat the market.

The logic is simple: If the broad market is rising, the optimal strategy is to own the assets that are rising the fastest to have a chance at outperforming the market. This is referred to on Wall Street as the “high beta factor.”

In the chart above, we’ve overlaid the S&P 500 (SPY) with a ratio of the S&P 500 High Beta ETF (SPHB) versus the S&P 500 Low Volatility ETF (SPLV).

High beta stocks are risk-on assets and tend to outperform during bull markets. Meanwhile, low volatility stocks are more defensive in nature, and for this reason are more likely to outperform during bear markets. As such, the ratio rises and falls with the broader market and provides us valuable information regarding risk appetite and what kind of market environment investors are positioning for.

Seeing the ratio hit its highest level since April of last year can only be viewed as a positive development for bullish investors. As long as these new highs hold, equity markets could follow higher over the coming weeks.

2/ Financials Score Fresh Highs

There was a “dash for trash” in U.S. equity markets today, with the most heavily shorted stocks squeezing higher and making big moves. However, the biggest laggards in the most speculative growth areas are not the only assets outperforming these days. Long-term leaders, many of which are cyclical in nature, are also trending higher.

Below is a chart of the Invesco Equal Weight Financials ETF (RYF) closing out the week at fresh nine-month highs.

This is a key level for RYF as it represents the pivot highs from August and November, meaning financials could be on their way to establishing a higher high. It also represents our former target at the 161.8% Fibonacci extension level, and some key lows from 2021, where former support has since turned into resistance.

As long as RYF can maintain these new highs and remain above the 60.50 zone, this could prove to be a valid trend reversal for financials. The bias could be higher for this critical sector.

3/ Don’t Fight Dr. Copper

It’s hard not to notice the buoyancy of commodity indexes. They simply refuse to break down. This could remain the case as long as industrial and base metals continue to outperform.

Here is a relative ratio chart of our equal-weight base metals index versus our broader commodity index:

These metals have outperformed since early November, and their relative strength has only accelerated in recent weeks.

We can’t imagine commodities breaking down at the sector level while copper futures continue to print fresh highs. Strength from these industrial metals also speaks to a healthy economic backdrop for risk assets in general.

4/ Is Uranium About to Go Nuclear?

If we’re in an environment where gold and copper are printing fresh highs, strength could spill over into the periphery. That group includes uranium futures.

Below is a long-term chart of the Uranium ETF (URA):

URA completed a multi-year base in April of 2021. It has since found support at a former resistance level marked by its prior-cycle highs from 2017. 

Meanwhile, price is forming a potential bullish consolidation as it takes the shape of a possible falling wedge.

Stocks and ETFs such as URA could catch many investors off guard if commodities are in the early stages of a new bull market. From the looks of base and industrial metals, that may appear to be the case.

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Originally posted 27th January, 2023