Market risk assessment tools and tactical investment opportunities driven by curated financial insight
Taking a look at the CBOE VIX and Put/Call Ratios at today's close, it appears that one of our more consistent "Extremes" indicators has turned neutral.
Equities have traversed through fits and starts of volatility recently, and that behavior had manifested itself in an extreme reading in late January (see the blue arrows on the right side of the chart below.
This extreme was highlighted in our recent Market Trend blog, introducing the potential for a short-term decline in equities (which happened).
The S&P 500 has since settled back to near its 34-day moving average (blue line) as recent gains are consolidated.
Our take is that with stock market settling back, it appears to be preparing for the next leg upward (resumption of the major trend). Indeed, major indices have been pushing up against overbought levels and upside momentum has been waning.
Although this neutral "extremes" indicator does not suggest any sharp downside risk, equities may need some more time to prepare for the resumption of the uptrend. A firm consolidation to the 34 or 50-day moving average, as the S&P 500 appears to be attempting, may be what is needed to prepare for the next leg up.
Our Credit Risk Extreme indicator is no longer at an extreme reading (measured by the gap vs. its moving average in the chart below). However, it is interesting to note that the indicator appears to be forming a double-bottom. A breakout from that basing range could suggest a shift to the downside in equities (and begin to favor bonds).
We will watch this relationship carefully, as a shift above its moving average signifies risks to equity positions. The good news (for equity bulls) is that the indicator is so low to begin with, that a shift above its moving average may not entail the meaningfulness as it had in the past. The jury is still out on the significance of this indicator as we close out the trading week.