Thursday, July 12, 2012

Risk-on or Risk-off

The chart below plots the ratio of Morgan Stanley Cyclical Index (CYC) to Morgan Stanley Consumer Index (CMR).

Ratio of Cyclical Index to Consumer Index

The direction of this ratio tells us what the markets expect for the US economy.  Since the ratio peaked on March 15, it has been trending down, implying that cycle resistant consumer staples sector has gained prominence over the cyclical sector since then.  The relationship between these two sectors also reveals the consumer sentiment and the  Risk-on or Risk-off sentiment of the market.  Markets rotating out of  the cyclical sector into consumer sector or vice versa (as divulged by the direction from which the green ratio line on the chart cuts its 200-day moving average) foretells the direction of the economy in the immediate future.