Stocks just experienced their fiercest selloff in years, followed by one of the most significant bounces in market history.
The VIX remains elevated, indicating a roughly 2% daily swing in either direction.
There is little evidence that we’re leaving these volatile times behind.
I think we’re in rally mode for now, but that doesn’t mean we’re suddenly in a risk-on environment again.
In fact, it’s been quite a risk-off rally since late last week.
I look at the relative performance of offensive and defensive groups to judge this kind of thing.
And here’s one of my favorite charts for it. This is Staples relative to the S&P 500:
And the pattern is what I like to call a bear market base.
What I mean by that, is this is the kind of reversal pattern that we see complete in bad times, not good ones.
Staples exhibit sustained leadership in bear markets, not bulls.
So, today, let’s keep it simple.
If the current rebound rally is to have legs and stocks go higher in the near-term, this base can’t print. Look for XLP/SPY to fail at the upper bounds and remain stuck in this range. That’s what will be happening if stocks keep running.
On the other hand, if this base goes, and we see a decisive breakout in staples relative to the broader market, the rally is sputtering out, and the bears are back in full control.
That’s it.
The level is 0.155, and we’re right on it now.
Throughout history, this ratio has given investors and analysts some of the most valuable and consistent insights on risk appetite. There are few things that have worked this good for this long. I don’t think that’s about to change.
Watch the staples relative performance. Wherever this chart goes, the market is going in the opposite direction.
