One of the clearest ways to gauge market risk appetite is by tracking where investors are putting their money.
For me, the best way to do this is by comparing Consumer Discretionary to Consumer Staples.
Discretionary stocks represent products or services consumers spend their "extra" income on — like cars, retailers, and homebuilders.
Staples are the essentials we keep buying, no matter how tough economic conditions get — things like toothpaste, laundry detergent, beer, soda, and cigarettes
It’s a simple but powerful cheat code chart for understanding how healthy the market really is.
Right now, this ratio is breaking out to new all-time highs.
Historically, when Discretionary outperforms, it signals an environment where market participants are rewarded for buying stocks, not shorting them.
The opposite is true when the ratio falls — money flows into Staples, and markets tend to struggle during that time.
So as long as this breakout holds, the bull market is in good shape and investors are clearly embracing risk.
I’ve been thinking about this a lot while in Dubai this week for the CMT Global Investment Summit, a gathering of some of the sharpest minds in the industry.
I’ll keep you posted, and if you happen to be nearby, feel free to stop by and say hi — always happy to talk markets.
