Chart Advisor: Investors Warm Up to Risk

Articles From: Investopedia
Website: Investopedia

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?

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

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.”

  data-src=
Source: All Star Charts, with data provided by Optuma

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.

  data-src=
Source: All Star Charts, with data provided by Optuma

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:

  data-src=
Source: All Star Charts, with data provided by Optuma

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):

  data-src=
Source: All Star Charts, with data provided by Optuma

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.

Originally posted 27th January, 2023

Disclosure: Investopedia

Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy.  While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Investopedia and is being posted with its permission. The views expressed in this material are solely those of the author and/or Investopedia and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.