Measuring Risk Appetite (2)

There are several ways for the technical analyst to measure the appetite for risk. The obvious way is to study risky assets such as the small cap indices and compare their relationship to the apparent less risky large cap indices. In a precious post I studied the Small Cap Index (XCS) vs. a Large Cap Index (XIU). We currently have a Risk Trade “ON” condition because the commodity sensitive XCS is beginning to out perform the XIU. We can also study the “Doomsday Trades” such as the 10-yr T-Note (TLT) or the Japanese YEN. Investors who embrace these “safe” assets are the perma-bears or lunatic fringe groups who basically couldn’t see a bull market in any asset class – even if it bit them on the ass.

Another sign of a return to risky assets would be a renewed round of takeovers and consolidation as corporations decide to put their cash to work. The recent $39 billion hostile bid for Potash Corp from BHP Billiton is a good example. I enjoyed some of the “Potash Effect” through the ownership of the Claymore Global Agriculture ETF (COW) and Viterra Inc. (VT). Now the task at hand is to seek out another takeover candidate or at least to latch on to an industry peer that should enjoy some of the “takeover effect”. Based on the recent takeover bids in the U.S. and Canada I scaned the commodity and technology sectors for stocks that display bid possibilities. The selection charted is displaying strong money flow numbers and a recent swing to relative outperform vs. the S&P/TSX60 large cap index (XIU) – any action here could ignite the entire copper producer space – Hudbay is a component of the TSX S&P/TSX Capped Diversified Metals & Mining Index.