Talking Points:
• Investor sentiment has taken a severe blow over the past month, and the S&P 500 has taken the brunt of the pain
• In a mid-August plunge, the equity index posted a severe enough move to post a record divergence from the mean
• Severe moves can be 'blow offs' which call bottoms/tops, but extremes are relative and risk is still buoyant
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Risk appetite has taken some exceptional blows these past months. One of the most painful selloffs has come on behalf of the S&P 500. The more than 10 percent drop in the span of five days a month ago was one of the most dramatic in years; and on a number of measures, it was certainly extreme. Extreme market moves are rare and frequently signal the end of dramatic periods that are followed by a 'return to normal'. From this benchmark, we have seen a similar move four year ago call the end of a sharp bear shift before reviving a bull trend that extended for years after. However, 'extremes' are relative. In the short-term, the drop through August was excessive. However, looking at the index's positioning and the fundamentals behind the market over the past six years, the balance of positioning leans far more aggressively to overbought territory. We take stock of risk trends by looking at the extreme positioning and movement of the S&P 500.
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