Money is always rotating from one segment to another. Sometimes this rotation is bullish, other times it’s bearish. Right now money is flowing from small caps into large caps, a sign that investors are losing their appetite for risk.
Somebody flipped the switch from ‘risk on’ to ‘risk off.’
There are many measures of ‘risk on – risk off.’ Almost all of them are lagging.
I usually don’t care for lagging gauges, but this one has an interesting twist.
Illustrated in the chart below is the ratio between the iShares Russell 2000 ETF (NYSEArca: IWM) and iShares Russell 1000 ETF (NYSEArca: IWB).
A high ratio means that investors prefer small caps over large caps (risk on) and vice versa.
This changed rather abruptly.
Here’s what makes this IWM:IWB ratio interesting:
The ratio has dropped to levels of prior support. As the dashed purple lines indicate, ratio lows generally occur fairly close to S&P 500 lows.
Obviously, the IWM:IWB is not at a new low, but the gray lines show that prior tests of this low caused temporary S&P 500 (NYSE: SPY) bounces.
This may be the case here too. A drop below the lower green support line, however, may indicate a change of investor behavior.
Less appetite for risk generally translates into lower prices.
While the IWM:IWB ratio has yet to drop below support, another indicator has already triggered a sell signal. More details here:’
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.
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