While there were some hints of a “throwing the baby out with the bathwater” type of environment yesterday, the selling for now seems more consistent with evidence of weakness that could continue than exhaustion that could produce a turn. The NYSE TRIN (a measure of selling and buying pressure) spiked to a new cycle high near 3.5. Outside of periods of stress, this is about as high as it gets. In periods of turmoil, it can move much higher (it peaked above 5 in 2015, above 7 in 2011 and approached 10 in 2008). NYSE volume was tilted 60-to-1 to the downside and new lows on NYSE+NASDAQ surged higher (though remained shy of their May peak).
Our Risk indicators suggest there is no need to rush toward Risk On positioning. The longer-term Risk On / Risk Off Indicator has been in Risk Off territory all year and moved sharply lower after yesterday’s broad-based selling (at one point in the day, all 504 stocks in the S&P 500 were down on the day). The intermediate-term version of the indicator is retreating as well and the short-term, which had climbed into Risk On territory over the past few weeks, is back in Risk Off mode. Our Risk On Index has made a lower low as investors shun risk assets in favor and relative safety (although even there some traditional relationships are struggling to persist).
After false starts in March and May, and our bull market re-birth checklist still being shut out, the burden of proof is on the bulls to show evidence of a sustainable move higher. In periods of stress, liquidity is a scarce asset. It has a tendency to evaporate when you need it most. There will almost certainly be a time to get more aggressive but the current message from our risk indicators is that now is not that time.
