3/8 Risk-Off
2 Alarms in 2 Weeks
Risk-Off Environment
The environment is definitively risk-off. Two alarms in two weeks, a weak close for the S&P 500 on Friday below 6750, a technical bearish crossover for the index, and risk-on barometers rejecting at key resistance levels. The system is doing exactly what it was designed to do— signalling the shift in environment from the year long risk-on trade to the beginnings of a risk-off segment. The duration is never defined, and magnitude is speculated, but as we navigate the coming weeks and months there will clue to monitor the severity of a correction, and thereafter for the formation of a bottom, and lastly a confirmation with a clearing of all risk-off criteria.
This is where the system shines in protecting capital.
The S&P 500 is about 4% off from it’s all time high, and the tech heavy Nasdaq a little more at 6%. It has been a year since the markets had to traverse any meaningful corrective move. With the charts that will be shared shared through today’s letter, I tend to think the S&P 500 is set to continue towards delivering a 10% corrective move, and consideration for more thereafter. This would have the index trade back towards 6300.
For the new readers:
Reference: “How I Think About The Risk-Off Alarm”
Risk-Off Alarm Criteria
Triggered when trend, breadth and momentum simultaneously close negative
Signals a risk-off environment
Reduce long exposure, take profit/review closing individual trade ideas, hedge long exposure, consideration for short trades
The environment is defined as risk-off from the confirmed alarm signal to the point where the risk-off criteria record 0/3 for two sessions. Throughout the risk-off period the criteria can oscillate between 1-3