Click to enlarge

Source: Fusion Analytics


Fascinating chart from my partner Kevin Lane – he works on the Institutional side and is the creator of the algos that drive FusionIQ.

Kev created a RiskOn/Risk Off chart by plotting High Beta, High Yield and Emerging Markets versus Consumer Staples, Health Care and Low Beta names. When risk appetites are higher, it is reflected in the ratio moving higher. When fear levels rise, and sector rotation switches to the defensive names,  and the ratio heads lower.

We do regular conference calls with subscribers of FusionIQ, and this is one of the charts we discussed on our call last night. You can download the full slideset here.



Fusion Analytics
Equity Market Research, February 28, 2013

Category: Psychology, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Risk On, Risk Off Index”

  1. A. Wells says:

    How is this different from saying that speculation drives the market up and when speculators pull back, prices fall?

  2. rd says:

    It appears to be quite feasible to build a tradable model based on the inverse correlation of S&P 500 returns and the outside temperature on Wall Street. I am sure that there is a valid economic backdrop that an economist could come up with as a rational explanation for this.

  3. ben22 says:

    how do you filter the crossovers of the 21 day average? I ask because there appear to be two false crossovers above the 50 day in 2011 and another false one below the 50 day in December 11′/early 12.

    just curious then if you only consider it a signal if it crosses above or below that 50 by a certain %

    nice chart…

  4. Woof says:

    Barry — was looking forward to seeing the slideset but link does no seem to be working. Thanks!

  5. Lookout Ranch says:

    The link to download the slide set doesn’t work.

  6. steveh18 says:

    no it doesn’t

  7. ConscienceofaConservative says:

    Nothing graphs the risk on risk off better than the price of australian dollars in japanese yen. This correlates beaufully against the s&p 500. Works over many years.

  8. Porsche87 says:

    Perhaps someone can explain how “sector rotation” is different from “money on the sidelines”. If I sell a high risk stock to move into a low risk stock, that means someone has bought that high risk stock from me. The same number of shares are sitting out there. The same is true when I buy the low risk stock, somebody else has sold it. So it seems we need a definition that involves either price movement or volatility and not one that implies a change in ownership percentages.

  9. ben22 says:


    I’ll give that a shot. This isn’t really about who bought and who sold but about what has relative outperformance.

    typically when people are talking about “cash on the sidelines” its in the context of “people have capital in money markets and they will buy XYZ stock or XYZ sector with it”

    “sector rotation” otoh, isn’t about money market to equity but from equity to equity and chartists will then observe which sectors are doing the best relative to the others and to the market as a whole

    If you study intermarket analysis what sector rotation warns you is that when you see relative outperformance in the sectors in the chart above like staples, utilities, healthcare/low beta then it has bearish implications for overall risk assets.

    John Murphy is well known for his writings in Intermarket Analysis and you can read more about sector rotation here:

    hope that helps

  10. Porsche87 says:

    Thanks Ben22,
    I guess that part I am having trouble with is who is buying in a declining sector. It seems a bit like buying a car during a deflationary period. You can be pretty sure it will be cheaper in another month or two, so why buy it now? But human nature is just like that, I guess.