The Risk-On/Off indicator shifts to risk-on

Key points:

• The Risk On/Off indicator surged higher relative to its recent range, triggering a new buy signal
• Similar precedents displayed excellent returns, win rates, and significance relative to random returns
• While Technology maintains its leadership status, individual stocks offer opportunities 

Breadth and sentiment-based indicators swiftly transition to a risk-on status

The sharp sell-off and rapid recovery in stock indexes suggest the correction may have been unjustified from a fundamental perspective. Regardless of the narrative, when indicators transition rapidly from oversold to overbought, the shift often foreshadows bullish market outcomes, a scenario I highlighted last week with Technology.

A swing trading system that uses the proprietary Sentimentrader Risk On/Off indicator, a composite encompassing 21 diverse sentiment and breadth-based measures, triggered a new buy signal when it recovered from the lower end of its 84-day range.

The previous alert occurred in May, leading to a 7% gain for the S&P 500 over the subsequent two months.

Similar range rank reversals generated a bullish outlook

Whenever the 84-day range rank for the Risk On/Off indicator cycled from below 5% to above 68.5%, with the S&P 500 above its 200-day average, the world's most benchmarked index displayed outstanding returns and consistency across all time frames. Furthermore, returns demonstrated significance relative to random returns across most time horizons.

Where should investors focus their attention now that we're back in a risk-on environment? 

Generally, bull market environments favor sectors with offensive qualities rather than defensive ones. Aside from Technology, which is experiencing an AI-driven innovation phase, sectors with positive relative trend scores lean more defensive. This composition likely reflects the easing in interest rates. 

Considering the defensive sector tone, investors would likely benefit from analyzing trends in specific stocks. 

The following table displays absolute and relative trend scores for cyclical-oriented stocks with a relative trend score of at least eight, meaning that 8 out of 10 trend-following indicators are currently bullish.

Netflix looks poised to recapture its previous high following a bullish trend score shift last week. A signal occurs when the composite increases by eight or more points over five days.

What the research tells us...

The Sentimentrader Risk-On/Off indicator, a diverse composite of breadth and sentiment measures, surged higher, triggering a buy signal for a swing trading system. Similar alerts in a long-term uptrend produced excellent returns and consistency for the world's most benchmarked index. With the S&P 500 and other indexes returning to a risk-on backdrop, investors should strategically allocate capital to the most promising sectors and stocks. Technology looks poised to maintain its leadership status. However, there are plenty of opportunities in individual stocks.