Market Regime Analysis: Low Participation, Low Volatility and Where Capital Is Going

We focus on weekly dollar value traded by market regime — (price x volume).

• Hands-Out has remained the dominant market context, and the week that ended yesterday pushed that condition even further.

A quick refresher to frame the magnitude of what we are showing:

• We are seeing Dollar Value Z-scores between -2.20𝛔 and -2.70𝛔. That places current activity deep in the left tail of the distribution, within roughly the lowest 2% of historical observations.
• These Z-scores do not mean there were no trades.
• They mean the dollar value traded was exceptionally small relative to the historical average for each market regime.
• The defining feature is not a tilt toward Risk On or Risk Off. It is the persistence of Hands-Out, week after week.
• This is not a measure of returns or volatility. It measures the size of transactions relative to their own historical distribution.

More on z scores

Intermarket Analysis: Participation Across Asset Classes

Shifting the lens from the risk regime to the intermarket regime, the premise remains unchanged.

In the chart on the right, the first column shows weekly volume Z-scores.

• The weakness is not concentrated in any particular asset type or category — it is broad-based across the intermarket structure.
• On the left, we see returns. But in this market structure, returns are largely irrelevant.
• The key signal is participation: transaction size remains exceptionally weak across assets, regardless of direction.

Market Regime Sensitivity

Over the last week, the chart on the left breaks sectors down by regime sensitivity to test whether the withdrawal in flows is uniform.

It is not.

• Assets with greater commodity sensitivity — those that tend to benefit from higher inflation and volatility — are seeing smaller outflows relative to the rest of the market, where the withdrawal is much more pronounced.

Where Is the Capital Going?

• Money market funds — invested in T-bills, repos and short-term paper — still yield close to the Fed Funds rate. The exact yield depends mainly on fees and portfolio composition.With Fed Funds at 3.50%–3.75%, top Treasury funds are still offering roughly 3.7%.
• This gives capital a place to wait while taking very little duration or equity risk.
• This is the size of capital waiting for a door to more attractive real returns.
• This is not a daily or swing-trading signal.
• It is a portfolio allocation issue.

The volatility regime is where the opportunity lies.

• Both realized and expected volatility remain at low levels, while rates and equity volatility are converging toward the same point.

Course of ActionTrading

• The trade, if any, is a mean-reversion trade in volatility.
• Given how fragile the market has become — and how sensitive it is to participation — once a meaningful move develops it will overshoot.
• That has direct implications for position sizing.

At the portfolio level

Hedging should be broad-based, covering:

• FX
• Rates
• Risk assets
• Defensive assets

There is very little conviction in this market today. What there is, however, is significant potential for conviction to become disproportionate once it finally appears.

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Intermarket Flow