Almost every risk-on/off indicator shifts to risk-on status

Key points:

• The Sentimentrader Risk On/Off Indicator increased above 90% for the first since July 2023
• Similar readings suggest some short-term digestion within the context of an uptrend

More and more indicators move to a risk-on status 

The Risk-On/Off Indicator, a composite encompassing 21 diverse sentiment and breadth-based measures, increased to the highest level since July 2023, with 90% of its components in a bullish status. 

As I noted in my recent report on the Technology sector, sometimes, when everything is in agreement, which is certainly the case now with the members in the Risk-On/Off indicator, the market hits the pause button. Usually, this buyer's exhaustion refreshes a bullish trend backdrop.

This pause scenario is evident in the annualized returns, which are slightly negative when the composite shows a reading above 90%.

The previous signal from July 2023 registered a max gain of 4.3% before the S&P 500 peaked at the end of the month. 

A wide range of sentiment and breadth-based indicators 

Similar Risk-On/Off indicator conditions occurred during uptrends

Except for 2002, whenever the Risk-On/Off indicator registered a reading of 90% or higher, it consistently signaled a bullish backdrop for the S&P 500. However, this almost near agreement by the components in the composite tended to mark some near-term exhaustion, especially over the following week. And over the subsequent few months, win rates fell short of historical instances in three out of four time periods.

Any digestion of the rapid ascent from last fall will most likely represent a pause, with the world's most benchmarked index showing an 89% win rate over the ensuing six months.

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What the research tells us...

With almost every indicator in the Risk-On/Off composite reflecting a shift to a risk-on status, market conditions are in solid shape, a fairly common trait in uptrends. However, when breadth and sentiment are in near agreement, like now, it can sometimes lead to a pause or buyer's strike. After similar readings in the Risk-On/off indicator, the S&P 500 was higher 89% of the time over the ensuing six months. So, any interruption in momentum is likely to represent a customary consolidation phase, which is entirely normal during a bullish market.