Traders Gauging Stock Market’s Next Move Keep Wary Eye on Flows

The selloff that took the S&P 500 Index into a correction last week was notable for its relative calm. Now, as investors scour metrics of market sentiment and key price levels for hints of either a recovery or a further slide, they also need to watch a more nebulous aspect: market liquidity.

Stock-market crises from the 1987 crash to Covid share a common theme: dried up liquidity intensified market moves. Now, with the rapid growth of derivatives, there’s a focus on how option positions affect underlying spot markets, especially given the tendency for derivatives blow-ups to linger in memory.