Talking Points:
- The S&P 500 suffered its single largest daily loss since the Brexit response alongside a large jump in volume
- Volume and conviction is at the crux of a true change in financial health moving forward
- There have been a number of false starts on the risk front over the months and years
See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.
In the dessert, even a cup of water can seem an oasis. This past week ended with a jolt of volatility and notable tumble from risk-linked assets. The intensity of the move was impressive. The US-based S&P 500 suffered its largest single-day drop and the VIX volatility index the sharpest increase since Brexit (June 24). However, we have to consider whether this is incredible because the scenario of a full-scale unwinding of the risky positioning that has escalated over the years is truly profound or rather because the environment has simply been so deflated that this move stands out. We have seen many swells in fear and selling pressure over the past months and years - some even as intense as the August 2015 tumble - that ultimately proved false heralds of a true market turn. Just as skepticism has proven a necessary filter for the climb these past months, it is just as important in the early phase of such a deep transition.
Beyond the intensity of the S&P 500 and VIX moves, signs that risk aversion may be taking serious root include: a broad decline in most risk-oriented assets; an early rise in volume (participation) alongside the price move; expectations of a seasonal shift; and intense skepticism over the health and stability of the financial system's lofty levels. While crucial aspects to an eventual turn, these are not yet inherently self-sustaining. If the shift were intense enough, we would see speculative conflicts behind the Dollar, Treasuries and even USD/JPY realign to 'risk' views. The foundation of this transition is conviction in equal parts sentiment and volume. It is the latter that has proven most difficult to generate and therefore should be closely monitored. Having seen so many false starts over the years and given the scale of the move that can arise in such a systemic change, it is worthwhile to be patient. We discuss the market's sentiment position through the anxiety-bolstered weekend in this weekend Strategy Video.
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