Risk Model Update

Clean air, baby!

A quick note this morning.

You should all be aware by now that I use two Risk Models when it comes to evaluating market conditions.

You’ll also be aware that dating back to February, both Risk Models have been signaling ‘risk off’ - sitting deep in what I call the ‘Red Zone’.

Here’s a quick refresher on what triggers both Risk Model 1 and Risk Model 2:

Risk Model 1 enters the red zone when the following conditions are met simultaneously: the VIX trades above its 50dma, the % of S&P 500 stocks trading above the 50dma falls below the 50dma and Credit Spreads (BAMLH0A0HYM2) trades above its 50dma.

Risk Model 2 enters the red zone when the following conditions are met simultaneously: the VIX trades above its 50dma, TLT/SPY trades above its 50dma and XLP/XLY trades above its 50dma.

Here’s how they’re looking as of this morning:

Risk Model 1

Risk Model 2

Both risk models appear to be trading in the ‘clean air zone’ - signaling the potential return of ‘risk on’ sentiment driven by the easing of tensions between the US, Israel and Iran.

These models have been incredibly effective over the last few years - and I wouldn’t bet against them whenever they enter the red zone, just as I wouldn’t bet against them whenever they enter clean air.

Will we see follow through during today’s session and into next week?

Nobody knows for sure.

But using these models as the basis for understanding trading conditions is vital if you’re in the business of preserving capital during drawdowns and making money during periods of relative calm.

If you’re interested in adding them to your charts on Trading View, just let me know in the comments and I’ll share the Pine Editor codes/indicators with you.

Best,

Alex