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The tone is still risk-off

Summary:
Mid-week market update: I have some good news and bad news. The good news is the performance of the NASDAQ 100,  the market leadership, has stabilized. The relative performance of the NASDAQ 100 against the S&P 500 successfully tested a rising relative trend line, and the relative uptrend is still intact.  The bad news is the NDX rally failed at the 50 day moving average, and the rest of the market is maintaining a risk-off tone.  Sentiment not washed-out There are numerous signs that sentiment is nowhere near a capitulation wash-out. Macro Charts highlighted analysis from Deutsche Bank indicating that equity flows are still strong for technology. These are not signs of fear, but greed.  Despite the market decline, there are few signs of anxiety in the put/call ratio, which

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Mid-week market update: I have some good news and bad news. The good news is the performance of the NASDAQ 100,  the market leadership, has stabilized. The relative performance of the NASDAQ 100 against the S&P 500 successfully tested a rising relative trend line, and the relative uptrend is still intact.
 

The tone is still risk-off

The bad news is the NDX rally failed at the 50 day moving average, and the rest of the market is maintaining a risk-off tone.
 

Sentiment not washed-out

There are numerous signs that sentiment is nowhere near a capitulation wash-out. Macro Charts highlighted analysis from Deutsche Bank indicating that equity flows are still strong for technology. These are not signs of fear, but greed.
 

The tone is still risk-off

Despite the market decline, there are few signs of anxiety in the put/call ratio, which is hardly elevated compared to levels seen at past short and intermediate term bottoms.
 

The tone is still risk-off

However, the nervousness in the option market can be seen in the term structure of option implied volatility, or premiums. A recent analysis from Goldman Sachs shows that the market expects volatility to be elevated until well after the election. I suggested several weeks ago that a contested election after the November 3 might be possible (see Volmageddon, or market melt-up?). That scenario is being priced into the markets.
 

The tone is still risk-off
To be sure, short-term retail speculation is starting to wane. Analysis from Callum Thomas shows that the volume ratio of leveraged long to short ETFs has pulled back. Readings are neutral and falling, but they are not at capitulation fear levels yet.
The tone is still risk-off

Risk appetite still cautious

Risk appetite indicators are neutral to negative. The ratio of high volatility to low volatility stocks exhibited a minor negative divergence when the market re-tested and broke technical support this week. As well, NYSE A-D Volume exhibited a strong negative divergence on the support break, though the NYSE A-D Line was neutral. These negative divergences were not as strong or clear as the negative divergences when the market broke support on a re-test in March. However, current market internals are nevertheless concerning.
 

The tone is still risk-off

Weak risk appetite is also evident in the currency markets. The USD Index staged an upside breakout of the 94 level. The USD Index has been highly negatively correlated with the S&P 500 (bottom panel). In addition, the Australian Dollar to Japanese Yen exchange rate (AUDJPY) is an extremely sensitive barometer of currency market risk appetite, and it is also showing signs of weakness.
 

The tone is still risk-off

In conclusion, investors and traders should brace for a period of sloppiness and volatility until the November election. Sentiment is nowhere near wash-out levels, and risk appetite is weak. The path of least resistance for the stock market is down.

Disclosure: Long SPXU
 

About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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