Risk Appetite Not What it Used to Be

In this item by Humble Student of the Market (i.e., fellow Seeking Alpha contributor Cam Hui), readers are alerted to a disconcerting topping pattern in one measure of the risk appetite for U.S. stocks, though it’s important to point out that a similar “risk off” development almost exactly a year ago did little to stop the fun that was had by all.

More specifically:

The recent carnage in the high flying Biotech and Social Media stocks are well-known, but the technical effects of the damage is likely to be long lasting. The chart below shows a composite index that I built based on an equally-weighted long position in the NASDAQ 100 and Russell 2000 (high beta risk-on index) minus an equally weighted short position in the defensive sectors of Consumer Staples, Telecom and Utilities (low beta risk-off index), where the composite Risk Appetite Index is set at 100 on December 31, 2011.

As the chart shows, the Risk Appetite Index has violated an uptrend and has started to roll over. This picture of fading risk appetite forms a negative divergence when compared to the SPX, which remains in an uptrend.