Assessing the Mood of the Markets

One of the most basic issues that I try to identify at the start of trading days is the mood of large market participants. Are they risk seeking, buying stocks, commodities, and corporate debt, or are they risk averse, taking money out of equities and parking it into Treasuries? As we can see from the charts above, in recent days investors have been aggressively buying stocks (SPY; top chart); selling Treasuries (lifting 10-year yields; middle chart); and buying oil (bottom chart).

When recessionary worries were dominating markets, we saw aggressive selling of stocks and oil and strong buying of Treasuries. That sentiment has been unwinding in recent days. By seeing how asset classes are trading during the day, we can infer speculative sentiment among "macro" traders and investors and gain important clues as to risk appetite for the instruments we are trading.

Comments

[morph366:]

You are using a rather surface level perspective and I suspect that measuring risk appetite is not so straightforward as this, especially on a day to day basis. Much more interesting to look at inter-market expressions of asset preferences when markets have reached extreme levels - such as the run up in crude last summer or the precipitous drop in Treasury yields at the end of 08.
A lot of sub surface dissonance can be taking place even when it seems that there is a growing/declining appetite for risk
One should expect there to be a muddying of the waters on a day to day basis regarding the underlying appetite for risk as lage macro traders opportunistically game the futures markets seeking out areas of critical support and resistance.

Jan 07 08:24 AM