According to a risk-on/risk-off metric that tracks investor sentiment and was developed by analytics firm Duality Research, risk aversion ruled for the majority of last month. However, in May, the mood shifted to one that is more enthusiastic.
Duality clarified in an interview with MarketWatch that its metric is based on several input variables, the most significant of which looks at the relative strength of defensive stocks.
“Ultimately, we’re aiming to gain a more comprehensive perspective on defensive names and how they’re performing relative to the broader market,” stated Duality.
Investors are frequently expressing a desire to place riskier wagers when the relative demand for protective equities declines.
With reference to the chart below, Duality stated that the S&P 500 SPX’s robust price action over the last week or two “flipped our risk-on/risk-off indicator back to green after more than a month in the red.”
In our weight-of-the-evidence methodology, the switch was “another data point going in the bulls bucket.” Such trend improvements, after all, can frequently create the foundation for a long-term rise,” they stated.
Duality stated in a Substack article at the beginning of the week that investors’ perception that peak tariff angst was achieved by mid-April, notwithstanding concerns of a slowing economy, was likely the reason for the stock market’s strong recovery.
“The rate of change is what really moves markets – so even if things aren’t great right now, improvement alone can keep the momentum going…as long as the administration keeps rolling back tariffs, then honestly, the macro noise probably doesn’t matter all that much,” the company stated.
A week ago, the S&P 500 SPX erased a 2.3% intraday fall, a rare and potent positive signal that highlighted the strength of the stock market, according to Duality.
“In fact, the last time it pulled off a move like that was back on October 13, 2022 – yep, the day the market bottomed during the 2022 bear market,” they claimed.
Duality did, however, also voice some warnings. Compared to the S&P 500, defensive staple stocks are still in a relative rise. “That’s not what we’d expect after such a strong [upward] reversal,” they stated.
Additionally, they note that despite equities grinding higher, investment-grade spreads—the additional interest rate above Treasury yields charged to safer corporations for borrowing—have stopped decreasing and are still above 100 basis points.
“We usually say nothing really bad happens when IG spreads are below 100, so it’d be nice to see that happen soon,” stated Duality.
