Monday, January 05, 2009

Risk Seeking or Risk Averse: The Mood of the Markets

One of the most basic issues that I try to identify at the start of trading days is the mood of large market participants. Are they risk seeking, buying stocks, commodities, and corporate debt, or are they risk averse, taking money out of equities and parking it into Treasuries? As we can see from the charts above, in recent days investors have been aggressively buying stocks (SPY; top chart); selling Treasuries (lifting 10-year yields; middle chart); and buying oil (bottom chart).

When recessionary worries were dominating markets, we saw aggressive selling of stocks and oil and strong buying of Treasuries. That sentiment has been unwinding in recent days. By seeing how asset classes are trading during the day, we can infer speculative sentiment among "macro" traders and investors and gain important clues as to risk appetite for the instruments we are trading.