On a daily basis we have many short term models running in the background.  One of those models is our short term liquidity model.

At Riskdials we define short term liquidity as the impact of order flow (ie. volume) on price.  Our algorithms classify liquidity for every single S&P500 stock to evaluate whether or not liquidity is changing internally – and produce the Oscillator shown on the bottom pane below.

This blue dots on the model shown below indicate when there has been a significant day over day shift in liquidity. Today we had a short term liquidity signal trigger – so what happened exactly?

To answer that – let’s go back two days.  Two days ago (28th November) we had a massive rally on relatively low volume across all S&P500 stocks, in other words few people actually participated in driving stock prices higher.  We define that as illiquidity – in fact our Oscillator printed an illiquidity score of 94 two days ago. On the 30th we had a significant change in character – we had almost no price change with extremely large participation.  This has clearly preceded some major tops in the past year and indicates a highly negatively asymmetric risk to reward profile for equities – especially after large rallies from oversold territory.

We hope you find this post useful and if you have any questions feel free to reach out.

Thank you