As we said in our blog post from Thursday, March 5th, we see a lot of "risk-off" behavior. If you are a client of ours, you know we do not predict what's going to happen. We simply follow our process. But, part of our process is being prepared for the next trade. So, while our tactical process has resulted in a heavy defensive posture, we have to be prepared to put the offense back on the field.
To that end, when everything is going well, we have a tendency to look for reasons to get defensive. Conversely, when we find ourselves in a very defensive position, we want to look for reasons to get offensive again. All the while we know, we are never going to get out at the top nor get back in at the bottom. That is not our goal.
With that in mind, take a look at the chart that heads this post. This is the daily candle chart for RSP, which is the Invesco S&P Equal Weight ETF. Note the blue gray bars that I've added to the chart. The way my eye sees it, the top blue gray bar could act as support.
However, take a look at our second chart.
This is the VIX, commonly referred to as "the fear index". The VIX jumped late last week, ending just shy of 30. Earlier in the week, I had noted the uptrend by adding that black trend line to the bottom of the action on the far right. Given what has been transpiring in the Middle East, an increase in "the fear index" is not a shocking development.
Here's the good news / bad news.
The good news is that VIX spikes like this can mark important bottoms ... but not always. Take a look at the final chart for today's note.
Now, we have the VIX in the bottom pane. The top pane is the S&P 500. Note the red circles on the VIX along with the corresponding red circles on the S&P 500. These spikes in the VIX marked important bottoms.
Now, the bad news. Take a look at the blue gray rectangles. You'll note that during 2022, the VIX was repeatedly jumping to ~30 and then retreating only to go back to 30 again. Looking at the price chart confirms that during those moments of fear, the jump may have indicated a bottom, but it was not the bottom.
So, what is the sum of this batch of evidence: caution is most certainly warranted. The recent spike in fear could coincide with the broad market finding support and the worst may be behind us. However, we cannot know for certain and with all the risk-off indicators that we see, we are going to heed their counsel.
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