Monday, November 30, 2009
Are Traders Showing Risk Appetite or Risk Aversion?
One indicator I like to follow during the trading day is the relative performance of small caps and emerging market stocks (EEM; chart above) relative to the large cap indexes, such as the Dow Jones Industrials and the S&P 500 Index. When traders are operating with a risk appetite, they tend to buy the more speculative small caps and emerging market stocks to take advantage of their beta. When traders are risk averse, they seek the safety of blue chip, large cap stocks.
So far today, small caps and emerging market stocks have been relative underperformers. That has been one factor that has led me to question the vigor of the afternoon bounce in stocks.