Data Diary

Risk appetite – treading water, trying not to look like a seal

Posted on 16 March 2010

Interesting currents wafting around the markets at the moment – while brokers have generally been upgrading their 6 to 12 month outlook for equities post the results season, indecision seems to be stalking some of our risk measures.

Consider the CBOE Put/Call ratio.  This has reasonable form at marking out extremes in sentiment, and critical turning points for the market:

The 10 day MA seems to be stamping out another low currently – with the recent low in the daily ratio at 0.43 on 9 March, it has been ratcheting higher since - this indicator is not favouring further upside in the short term.

Looking to CDS spreads and equity volatility, these too are rather ambivalent:

The flattening of both curves has indecision writ large.  It begs the question as to whether we have reached the absolute levels that should prevail in the post credit bubble environment.

Finally, we look to that old but familiar smoking jacket, the AUDYEN cross, for a little guidance.  As a carry trade favourite – supported by the China commodity story to boot – this pair should be continuing to shine if the risk trade is still on.  But again – there is same pattern emerging – momentum has fallen with a break of the dominant uptrend and a lower high.  Again suggests uncertainty around the risk trade.

This isn’t to say that the end of the world is at hand. More that caution is probably the best course of action in the current market – rather than boldly following the broker upgrades into an optimistically positioned market. It’ll be clarity about earnings that will give a firm basis to the market’s valuation – contraction in risk spreads seems to have run its course.