Throw Another “Risk-On” Sign into the Pile VIEW IN BROWSER By Michael Salvatore, Editor, TradeSmith Daily In This Digest: In times like this, it’s helpful to understand market relationships… When investors are greedy, they tend to favor certain sectors over others. Rarely will you hear high-octane, greed-driven stock pitches for names like Procter & Gamble (PG), Target (TGT), and Hershey (HSY). These are defensive plays – where you run to when the market is trading poorly. Lately, though, these stocks have not been trading well. This reflects not just investor appetite, but their perception of the state of the consumer. When the consumer is in good shape, they’re happy to spend beyond the “needs” offered by staples companies and start doing some more discretionary “wants” spending. So naturally, now that staples stocks are out of fashion… discretionary stocks like Amazon (AMZN), Tesla (TSLA), Booking Holdings (BKNG), and Royal Caribbean (RCL) are hot. The way these two sectors play off each other is a key market relationship. When discretionary stocks outperform staples – especially at a rapid pace – we’re in a risk-on environment. Where it gets tricky, of course, is when this relationship spikes and reverses lower. Take a look at this chart of XLY divided by XLP and its Relative Strength Index (RSI): 
When the line above rises, discretionaries are outperforming staples, and vice versa. I’ve marked a few extreme periods of momentum to the upside and downside with red lines. In 2020, the flight away from risk was rapid, but quickly reversed higher and hardly looking back. Then, at the end of 2021, a massive thrust of greed gave way to a painful bear market, which took the ratio down to its lowest level since 2016. Check out what’s happened recently. The ratio got as overbought as it’s been since the euphoria of summer 2018. Then, as the tariff disruption kicked off, investors rushed into staples yet again. Right now, the ratio is at a pretty comfortable level. Discretionaries are on a good run, but nothing too extreme. However, if we saw this ratio crest in the January 2025 or December 2021 highs, it would add to the pile of reasons to start trimming risk as we enter the seasonally bearish period for stocks. | Recommended Link | | | | Imagine foreseeing a 30% stock jump – to the day – weeks before it happens. Introducing a new way to predict the biggest stock jumps in today’s volatile market, to the day, with 83% backtested accuracy. Click here to learn more. |  | | At the same time, another key market relationship is approaching “price discovery” mode… That’s the difference between tech stocks and industrials. Take a look at this chart of the Nasdaq 100 vs. the Dow Jones Industrial Average: 
What we see here can either read as alarming or as a natural evolution of the economy. The Nasdaq 100 hasn’t traded so well against the Dow Jones Industrial Average – which, we should note, does hold a few tech names like IBM (IBM), Microsoft (MSFT), and Intel (INTC) – since the dot-com bubble. It originally posted the multi-decade high in late 2023 and is now knocking on the door of those levels once again. To me, though, this isn’t anything to worry about. Tech has gradually become a more dominant force in the economy than traditional industry. The rapid growth of the internet and purely digital business has seen to that. Moreover, the pace of this growth was nothing like the dot-com bubble. Tech has spent more than 20 years reaching these levels again – not the kind of activity one expects from a true mania. Still, watch this chart. Should we start to see a steeper slope upward, that could be a clue of some exuberant froth that could use some washing out. But the ride higher through July continues on… Our eyes remain glued to the seasonality charts this month. The trend through July is broadly, strongly bullish. But after that, you’re faced with two of the weakest months for stocks all year long. Here we can see that Discretionary stocks have a particularly strong surge toward the end of the month, with the sector positive 60% of the time for an average return of just over 1.04% from Friday through tomorrow. 
July 22 is the seasonal peak of XLY for the summer. After that, it’s largely spent the next two months falling until its trough at the start of October. There’s still plenty of time to trade the remainder of the bullish seasonal wave. And for some great ideas, I always like to look at Jason Bodner’s Quantum Edge Hotlist. We like to share Jason’s list every so often here in TradeSmith Daily as a font of great stock ideas. It shows the top 10 rated stocks of his Quantum Edge system, which uses a combination of strong growth fundamentals, technical momentum, and institutional level buying volume to rate thousands of qualifying stocks. Here is last week’s list (subscribers will receive the newest list this afternoon): 
The sector diversity among the top brass this week is really something. We have a specialty industrial name in Core & Main (CNM), Financials in Wisdomtree (WT) and SEI Investments (SEIC), alongside big-name tech (AVGO, MSFT), discretionaries (BSY, RCL), and a whole lot more. At the bottom rankings we see, per usual, a whole lot of biopharmas and REITs – with Diageo also showing up. The top 10 are your list of stocks to trade to the upside over the rest of the coming seasonal period. And those bottom-ranked stocks, depending on their unique setups, may be downside targets as well. But you can use this tool to audit your portfolio for seasonality… Something I’ve personally been doing this week is running all my biggest winning stocks through TradeSmith’s seasonality tool. That’s because, like I showed you last week, there’s plenty of evidence to believe now’s the time to take some profits off the table. A lot of stocks’ seasonality charts look like this one for Blackstone (BX), with a drop-off around July 30. By setting profit targets that let you grab gains as soon as you’ve got ‘em, Trade Cycles subscribers are already out with a 128.7% profit on BX calls: 
Ahead of this market turning point, we’re making these available even to those of you who have yet to subscribe to Trade Cycles. You just need to go here and sign up for this week’s webinar with our CEO Keith Kaplan. When you do, you’ll get limited time access to the rest of the year’s seasonality signals… for any stock, ETF, or index we track… 100% free. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily (Michael Salvatore held a position in TSLA at time of writing.) | 
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