Market Stress Is Definitely Real...But Is It Enough To Break Things?

Chris Kline

11 minutes ago

4 min read

1.) RISK - Risk is, of course, part of the game in markets and investing. Our process uses a mathematical approach by focusing on algorithms that work to identify market flows. In other words, where's the money flowing into or out of. Goldman Sachs publishes a proprietary composite gauge for what they refer to as the "Risk Appetite Indicator" (RAI). This indicator helps to give a glimpse into the market's risk on or risk off stance by tracking global market risk appetite (and aversion) by combining signals from many market variables across equities, fixed income, credit, commodities, and related assets. High positive readings reflect strong risk-on sentiment; low or negative readings signal risk aversion. Extreme lows (especially below roughly -1.5 to -2) are often watched as potential contrarian signals that markets may have overshot. Where are we now? Not quite at those contrarian levels that have marked durable bottoms...but not far either.

Black chart of GS Risk Appetite Indicator showing green and red monthly bars; October 2026 marked as one of its largest declines.

What can the RAI tell us based on history? Well, history doesn't offer much comfort for the buy and hold crowd. Following the 11 largest declines in Goldman’s RAI since 2005, the S&P 500 has delivered returns ranging from -17% to +7% over one month and -32% to +18% over six months. In other words, the positioning reset that we've been seeing is no guarantee of a bottom. There remains plenty of tail risk in both directions - up and down.

Table titled 12 largest monthly RAI declines since 2005 and S&P 500 returns after, with one highlighted Oct-2026 est. row on black background.

2.) FLOWS - I've noted before how CTAs are big money movers in markets. Understanding their flows is a good place to start when trying to understand whether a market's risk on or risk off perspective is accurate. Right now, CTA flows look negligible in a flat tape - a market not moving up or down much - this week. The US component of the flow model suggests about $4.4 billion of selling in that flat tape. That's not much. But the one-month setup is less calm. Downside selling for the US component could reach about $69 billion in a falling market, while an upside move could trigger about $36 billion in buying. It's different on the international scale with the potential for $164 billion of selling in a down market to $120 billion of buying in an up market. That's some pretty serious flow convexity in both directions. Key thresholds to watch for the S&P 500 would be: short-term 7,713, medium-term 7,544 and long-term 7,082. The medium-term level is the most important.

Dark financial line chart titled GS CTA Estimates in S&P 500, with blue, red, white, and yellow lines dropping sharply toward December.

3.) TECH P/E - Price to earnings ratios give us the easiest read on valuations of market constituents. Given the recent sell-off in tech, their valuations have compressed sharply. Multiples are approaching levels not seen in some time. The irony of it all? Just as investors are scrambling to abandon tech, the relative valuation argument is starting to look really interesting. Does that mean a renewal of the bull is here? Not necessarily. There are other factors at play. The macro picture is getting more interesting as we may be in the midst of the market pulling forward the deceleration in both growth and inflation expected in Q1, 2027. Accelerations and decelerations in those macro factors are fairly easy to read...it just requires a lot of bean counting - counting the daily, weekly and monthly data points that make up GDP and CPI. Of course the data can shift, but right now, we're seeing a deceleration in both GDP and CPI for Q1 2027.

Blue line chart of Nasdaq 100 P/E Ratio on a black Bloomberg screen, peaking near 28x then falling to about 19x.

Even though values are interesting, is there credit stress in tech? Yes! Credit stress is something that is always important when considering how stocks might behave in the near term. And there is definitely some credit stress in the system for some of the big players. Credit default swap spread pricing is a good way to see if stress is rising or falling. Here's a look at the credit default swap spreads for the Nasdaq along with some of the biggest constituents like Nvidia, Amazon and Broadcom. Clearly, stress is elevated in those names. Are any of those guys at risk of actual default? Highly unlikely. But that doesn't stop the market form pricing it. It would be good for the bulls if these CDS prices started falling.

Dark stock chart with red, blue, yellow, and white lines surging upward, highlighted by a green box on the right.

So what is all this pointing to? That risk in the market due to the tech correction is still present. That the market may be pulling forward the Q1 2027 decelerations in GDP and CPI that look probable at this point. If that is what the market is doing, we may see more corrective action in markets until we get past both the elections and Nvidia's earnings on the 17th.

Right now, the Nasdaq is in a bearish (downward bias) trend until it can get back above 26,715 and stay there. Might we bounce and fail? Yes.

The S&P 500 is in a bearish trend until it can get back above 7725 and stay there. Might we bounce and fail? Yes.

The Dow Industrials are in a bearish trend and will stay there unless it can get back above 52,855.

The Russell 2000 (small caps) are in a bearish trend and will remain there until it can get back above 2920.

On a positive note, The S&P 500 equal weight ETF is BULLISH trend and will remain there as long as it stays above $214.

You may want to consider reducing risk if you do not have a process that identifies market flows on an intermediate term scale. Let us know if you'd like to know how a system like that works.