Did A New ‘Risk Off’ Cycle Start? Are Stock Markets About To Decline Sharply?

Not only have stock markets been volatile since January, also the fear of a stock market crash in 2018 is rising. Is this legitimate or not?

In this alert Stock Market Crash 2018 About To Start published 2 months ago we concluded the following:

This is intermarket dynamics, this is how many flows across markets, this is where smart investors which are ahead of the game show traces of what they are doing. And that’s what we are following. Long story short: the Yen is not revealing any preliminary sign a stock market crash in 2018.

Essentially, we looked at the Yen chart looking for leading indicator signals. We did not observe any concerning sign in there.

Theoretically, there are 3 other assets which can benefit from ‘risk off’ cycles. In monetary terms, once smart and large investors get concerned, they send their capital to ‘risk off’ assets suggesting that a new ‘risk off’ cycle has started.

The 3 assets we are talking about are (other than the Yen): the volatility index, high beta stocks, interest rates.

Note: we, of course, are not talking about the alternating risk on/risk off that mainstream media references every other day, as for instance in this Bloomberg article. We are looking for secular trends in which investors hold positions for 12 to 18 months which is how the vast majority of profits are made. That’s the only thing we are interested in.

3 more ‘risk off’ assets reviewed

The volatility index chart below, the VIX, is overlaid by the risk on/risk off cycles in stock markets. As clearly seen, the 22 to 27 area provides heavy resistance. Only occasionally has the VIX gone higher, and it has primarily done so during ‘risk off’ cycles.

What can we derive from the VIX shooting up to 50 a few weeks back? Not a lot at this point in time. There have been instance in the past in which the VIX reached similar levels even in ‘risk on’ cycles.