Aug

21

I have noticed that my trading systems suffer whenever there is a so-called "flight to quality". By this I mean not simply that the stock market is down, but that all "risky" assets are suffering uniformly as funds are redeployed toward safer instruments. When everything starts to trend is when I get in trouble.

What is a good list of indications that we are in such a regime? I would like to recognize this within the day, not days after it has begun. I can think of a few possibilities for what I would call an FTQ indicator:

  1. Simultaneous rise in strong currencies, such as CHF and perhaps a couple of EUR, GBP, JPY.
  2. Change in the spread between government bills, notes, and bonds, and the equivalent duration commercial paper.
  3. Large jump in intraday correlation between interest rate instruments and currencies.
  4. Dramatic sector rotation in equities.

FTQ happens when some market participants start to panic. I guess what I am looking for is an early-warning panic indicator.

Philip J. McDonnell writes:

To Mr. Cooper's list I would add:

1. The VIX
2. The VIC (increased range in the SnP)
3. Large positive correlation between diverse assets possibly due to margin calls even if the swoon starts with alt a debt it spreads to S&P, silver and soybeans because of cross market liquidations
4. The ratio between the S&P (quality) and the Russell 2000 (lesser quality)
5. The SPY (stocks) / TLT (bonds) ratio 


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