The S&P 500 liquidity premium indicator triggered a risk-on signal

Key points

• The S&P 500 Liquidity Premium indicator has officially triggered a risk-on alert, indicating a shift from market uncertainty back to confident participation.
• Historically, when the indicator's 84-day range rank cycles from above 99% down to less than 42%, the SPY ETF displays excellent forward returns and consistency.
• The inverse of this indicator can serve as a tactical risk-off signal, historically preceding near-term S&P 500 declines 81% of the time over a two-week period.

A sentiment gauge based on trading volume triggered a risk-on alert

The S&P 500 Liquidity Premium indicator compares the volume of the S&P 500 ETF (SPY) to the volume of the underlying stocks comprising the S&P 500. When volume in the ETF increases relative to stocks, the indicator rises, indicating that investors are uncertain about the outlook for the market, a scenario typically associated with corrective phases. Eventually, confidence returns and volume increases in individual stocks compared to the ETF, causing the indicator to shift lower.

The model we use for the SPY liquidity premium indicator is similar to several other systems we've shared. We apply a range rank to the liquidity premium indicator. In this case, the optimal lookback period for the range is four mon