• 516 days Will The ECB Continue To Hike Rates?
  • 516 days Forbes: Aramco Remains Largest Company In The Middle East
  • 518 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 918 days Could Crypto Overtake Traditional Investment?
  • 922 days Americans Still Quitting Jobs At Record Pace
  • 924 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 927 days Is The Dollar Too Strong?
  • 928 days Big Tech Disappoints Investors on Earnings Calls
  • 929 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 930 days China Is Quietly Trying To Distance Itself From Russia
  • 931 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 935 days Crypto Investors Won Big In 2021
  • 935 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 936 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 938 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 938 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 942 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 942 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 942 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 945 days Are NFTs About To Take Over Gaming?
What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

  1. Home
  2. Markets
  3. Other

VIX, 'Flash Crash' Assets Tell Us Bears Are Gaining Traction

Traders, money managers, and individual investors have numerous concerns relative to the 'risk-on' or inflation trade:

  • QE2 is set to be completed in June.
  • Spain's credit rating was downgraded today.
  • Unemployment remains high.
  • Ongoing unrest in the Middle East.
  • Surging oil prices threaten the economic recovery.
  • Eye-popping budget and entitlement problems in the U.S.

In order to better understand the possible impact of the completion of QE2, we are in the process of studying the 'flash crash' period and the period following Ben Bernanke's August 2010 Jackson Hole speech. Our work to date may help us better understand the risks of a continuing correction in today's markets. As outlined on March 3, the longer-term outlook for stocks remains favorable, but the short-term outlook is cloudy.

There were very few places to hide during the flash crash correction which kicked off on April 23, 2010. The pain for investors did not end until the S&P 500 had given back 13.20% before finding some footing on August 27, 2010. The table below shows a select list of ETFs that provided defensive cover during the dark days of 2010.

Defensive ETFs Defensive Investments

In the minds of market participants, the assets listed above were the safe havens of choice when the dial on the risk trade moved from "on" to "off". On Valentine's Day 2011, defensive assets began to show improving relative strength vs. the S&P 500. The flash crash winners highlighted in blue above have continued to draw increasing interest from buyers over the past four weeks (see relative strength charts below). The investments listed in the table above serve as a de facto shopping list should the current pullback morph into a full blown correction.

The relative strength lines of the VIX or the 'fear index' and utilities have moved higher in recent weeks, indicating increasing concerns about further downside in risk assets.

Relative Strength Defensive ETFs Defensive Investments

While relative strength is a term from technical analysis, the concept of buyers becoming more interested in defensive assets falls under the common sense category when it comes to risk management. Based on other concerns, we already hold the highest percentage of cash since late November 2010 as a way to reduce risk until the threat of continued downside subsides somewhat. In terms of current strategy, the increasing relative strength of defensive assets tells us:

  • Market participants are becoming increasingly nervous.
  • Further downside is possible.
  • To continue to monitor defensive assets.
  • To be open to raising more cash, based on the incremental approach, should conditions deteriorate further.

Increasing interest in bonds is not good news for stock and commodity investors.

Relative Strength Defensive ETFs Defensive Investments

For those not familiar with technical analysis, the green lines in the relative strength charts all have positive slopes, which highlight an increasing interest in defensive assets relative to the stock market in general.

Gold's safe haven status appears to be intact.

Relative Strength Defensive ETFs Defensive Investments

It is not time to panic relative to the possible continuation of the current correction, but we are happy we have taken some profits off the table in recent weeks. The defensive assets shown above will continue to help us monitor the risk tolerance of market participants, who ultimately determine the value of our portfolios.

Corporate bonds and stocks in Malaysia held up well during the 2010 flash crash correction. Buyers are again showing interest over the last few weeks.

Relative Strength Defensive ETFs Defensive Investments

 

Back to homepage

Leave a comment

Leave a comment