Three Holds, Treasuries Hedge
Three of four signals favor risk-on positioning. The Treasury rotation lone holdout continues to flag a defensive undertone beneath the surface.
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Three Holds, Treasuries Hedge
SIGNAL SUMMARY
Key Takeaways:
• Signal 1 (Beta Rotation) remains Risk-On with the XLU/SPY 4-week RoC at -0.82%. The S&P 500 continues to outperform Utilities, signaling that risk appetite still favors broad equity over defensive sectors. The allocation remains 100% SPY.
• Signal 2 (Treasury Rotation) is RISK-OFF on the latest May month-end reading. TLT returned 0.16% in May versus IEF at -0.35%. Long-duration bonds outperformed intermediate maturities, a defensive risk-appetite indicator. The signal will hold this reading through the end of June. The current allocation tilts toward long-duration Treasuries (VLGSX/TLT).
• Signal 3 (Lumber/Gold) is RISK-ON on the latest 13-week relative-performance reading. Lumber’s 13-week return of 1.30% exceeds gold’s -11.72%. All seven sub-strategies are positioned offensively, with cyclical exposures favored over defensive bond pairs.
• The S&P 500 at 7,383.73 sits +7.7% above its 200-day SMA of 6,858.26. Signal 4 remains Risk-On, with the allocation set to SSO (2x leveraged S&P 500). Trend remains intact even after Friday’s broad equity selloff.
MARKET COMMENTARY
The framework reads 3-1 Risk-On this week. Three of the four intermarket indicators favor offensive positioning, with the Treasury Rotation signal the lone defensive holdout on the May month-end reading. The S&P 500 closed at 7,383.73 on June 5 — a sharp single-day selloff capped the week — with the index still sitting +7.7% above its 200-day moving average of 6,858.26. Trend, beta rotation, and lumber/gold remain aligned with risk, but the long-duration Treasury bid suggests pockets of caution beneath the surface.
The week ending June 5 closed with a sharp broad-based equity selloff, with the S&P 500 dropping approximately 2.65% on Friday alone to 7,383.73 from the prior session’s 7,584.32. Despite the single-session shock, the index still holds well above its rising 200-day moving average, and the weekly close did not break the bullish trend structure that has been in place since the early-year breakout. Beneath the headline drawdown, defensive sectors held up relatively better and long-duration Treasury bids picked up — a pattern consistent with this week’s Treasury Rotation flip to Risk-Off. Earnings season has wound down with broadly stable forward guidance, and macro data continues to trace a soft-landing path, but valuations, positioning, and concentration risk all argue for tactical respect of the framework’s defensive holdout.
At 7,383.73, the index sits +7.7% above its 200-day SMA of 6,858.26. That spread is comfortable enough to keep Signal 4 on the offensive 2x leveraged allocation, but it has tightened from the prior week as Friday’s selloff compressed the cushion. Volatility expanded on the week as expected, with the VIX moving off multi-month lows. The technical setup remains constructive in the aggregate — price above a rising 200-day, breadth still expanding versus a month ago — but the divergence between the trend signal and the Treasury Rotation signal is the kind of split that historically precedes either a pause in the trend or a stronger rotation into defense.
The Beta Rotation signal remains Risk-On with the XLU/SPY 4-week Rate of Change at -0.82%. Utilities continue to underperform the broad market over the trailing four weeks, with the negative RoC reflecting persistent flows out of defensive equity sectors. The persistence of this reading across multiple weeks supports the broader risk-on tilt and confirms that Friday’s selloff has not yet triggered a defensive sector rotation. The framework’s allocation stays on SPY.
The Treasury Rotation signal is Risk-Off on the May month-end reading. TLT returned 0.16% in May versus IEF at -0.35%, with the long bond outperforming the intermediate — a classic defensive risk-appetite signature. The signal will hold this May reading through the end of June. Long-duration outperformance during a backdrop of generally rising equity tells a story of yield-curve flattening pressure and creeping recessionary positioning at the long end. This is the lone defensive holdout in the framework this week and warrants close attention. A persistent Risk-Off Treasury signal alongside a Risk-On 200-day reading is the kind of divergence that historically signals an inflection point: either the equity trend resolves the divergence by following Treasuries lower, or Treasuries reconverge upward.
The Lumber/Gold signal is RISK-ON on the latest 13-week reading. Lumber’s 13-week return of 1.30% exceeds gold’s -11.72%. All seven Lumber/Gold sub-strategies are positioned offensively, with cyclical and growth-tilted pairs favored over defensive bond pairs. Lumber has held its bid as housing demand expectations firm, while gold has pulled back from its early-May highs and sold off sharply Friday alongside equities. The relative dynamic stays Risk-On and the spread actually widened on Friday’s gold decline — a re-acceleration in gold would be required to flip the signal.
The 3-1 Risk-On reading sits in the middle of the framework’s distribution. Mixed readings with one defensive holdout often precede broader pivots in either direction — either the holdout reconverges to the rest, or the rest converge to the holdout. The current setup demands tactical respect: maintain offensive allocations where signals call for them, but recognize that the Treasury Rotation flip and Friday’s broad equity selloff are coherent signals worth monitoring. The risks worth watching are an acceleration of the long-Treasury bid, a continued series of broad equity selloffs that compress the cushion above the 200-day, or a flip of the Lumber/Gold spread back to gold-favored.
SIGNAL 1: BETA ROTATION
Based on: “Opposing Behavioral Forces: Beta Rotation” (SSRN 2417974)
Target Investor: Self-directed investors who want to capture relative strength between equity market segments. This signal uses the 4-week rate of change of the Utilities-to-S&P 500 price ratio to determine whether the market favors offense (broad equity) or defense (Utilities).
CURRENT INDICATOR: RISK-ON
XLU/SPY 4-Week Rate of Change: -0.82%
Current Allocation: 100% SPY (S&P 500)
Growth of $100,000 | YTD from January 3, 2025 | Data: Lead-Lag Publishing, LLC
SIGNAL 2: TACTICAL RISK ROTATION
Based on: “A Quantitative Approach to Tactical Asset Allocation” (SSRN 2431022)
Target Investor: Conservative to moderate investors seeking a tactical overlay between equities and long-duration Treasuries. This signal compares the prior month total return of 10-year versus 30-year Treasury bonds to identify shifts in the yield curve’s risk appetite signal.
CURRENT INDICATOR: RISK-OFF
30yr Treasury (TLT) May Return: 0.16%
10yr Treasury (IEF) May Return: -0.35%
Current Allocation: 100% Long-Duration Treasuries (VLGSX/TLT)
Growth of $100,000 | Monthly Data from January 2025 | Data: Lead-Lag Publishing, LLC
SIGNAL 3: LUMBER/GOLD RATIO
Based on: “Lumber: Worth Its Weight in Gold” (SSRN 2604248)
Target Investor: Active investors seeking to rotate between offensive and defensive exposures across multiple asset class pairings. This signal uses the 13-week relative performance of Lumber futures versus Gold spot to determine the market’s risk appetite. When Lumber outperforms Gold, the economy is likely strengthening (Risk-On). When Gold outperforms, investors should favor defensive positioning (Risk-Off).
CURRENT INDICATOR: RISK-ON
Lumber 13-Week Return: 1.30%
Gold 13-Week Return: -11.72%
Lumber now outperforming Gold over 13 weeks. All 7 sub-strategies have rotated to offensive positioning.
Lumber/Gold Bond Rotation (SPY vs GOVT)
Growth of $100,000 | YTD from January 3, 2025 | Data: Lead-Lag Publishing, LLC
Lumber/Gold Buy-Write (SPY vs PBP)
Growth of $100,000 | YTD from January 3, 2025 | Data: Lead-Lag Publishing, LLC
Lumber/Gold Low Volatility (SPY vs SPLV)
