This is a republication of a 10/17/2014 post that I published at Seekingalpha. Vix Asset Allocation Model | Seeking Alpha I formulated this Model in early 2007 after looking for the first time at a VIX chart.
The last Stable Vix Pattern started to form in March 2023.
All links to SA posts no longer work including the one above. The link will only take you to my SA page rather than the linked post.
Since the VIX may soon form a Trigger Event, I decided to republish that old post here verbatim.
CBOE Volatility Index (^VIX) - Yahoo Finance
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For several years now, I am been writing posts explaining my Vix Asset Allocation Model. I thought that it would be helpful to summarize that Model in an Instablog Post here at SeekingAlpha. I will be summarizing more lengthy discussions contained in my blog, with some liberal drag and drops mostly from the following posts.
Vix Asset Allocation Model Explained Simply
Use of the VIX as a Timing Model
VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern-August 2007 Trigger Event
VIX and S & P Compared 1990 to 1997
Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2
This model is based on historical patterns and is obvious once an investor opens a long term VIX Chart and knows the stock market history between 1990 and now: VOLATILITY S&P 500 Index Chart
There are two Main Patterns:
1. Stable Vix Pattern: Continuous Movement in the Vix below 20, an investable bull market in stocks.
2. Unstable Vix Pattern: A Whipsaw Pattern Movement in the VIX at levels above 20, a far more riskier market for the individual investor, most likely what most people would call a bear market, or a Transition Phase from a bull to a bear market.
Each Main Pattern is divided into Two Phases:
Phase 1 STABLE VIX PATTERN: Mostly moving in a range from 15 to 20
Phase 2 STABLE VIX PATTERN: Mostly moving in a range of 10 to 15
Phase 1 Unstable Vix Pattern: Whipsaw Movement in the VIX mostly in the 20 to 30 range with temporary movements below 20 and above 30, mostly descriptive of an ongoing bear market with periodic rallies, and also descriptive of a Transition Phase from Bull to Bear.
Phase 2 Unstable Vix Pattern: Catastrophic Bear Market marked by a decisive break in a Phase 1 movement by a major burst into the 40s followed by even more elevated levels in the VIX.
Alert: An "Alert" happens when either an unusual break in a pre-existing pattern occurs, or there is some meandering by the VIX above a level considered to be significant under the model, without a decisive break into a bull or bear pattern characteristic of the Transition Phase or an unstable VIX pattern. An example of an alert is the decisive break in the Phase 2 bull market pattern in the VIX in 2/07. (see typical story from February 2007. The break was not a trigger event since the pattern broken was a stable bull market pattern Phase 2, and the Phase 1 pattern was still stable. An alert, however, should cause an investor to learn everything possible about the external events causing the alerts and to be considering possible major changes in asset allocation.
A Trigger Event Ushers in the Unstable Vix Pattern: A "Trigger" is a decisive break in the stable bull market pattern by a spike in volatility clearly outside the range tolerable for a Stable VIX pattern. Those spikes happened in two stages in 2007, in August and November. The trigger event requires a change in exposure to stocks. Timing of that change can vary, but LB (my Left Brain) has noted under all models covering the entire time period for which there is a volatility index that there would have been at least one, usually two, counter-moves back to below 20 that would be accompanied by a rise in the market average. This would afford an opportunity to lighten up at better prices than prevalent during the TRIGGER EVENT Phase. While this opportunity has happened in the past, there is certainly no guarantee that it will happen after the next Trigger Event or any other ones in the future.
Trigger Events:
April 1987 based on volatility index for the S & P 100 (VIX data starts in 1990): Parallels to VXO 1987-1988
October 1997: More on VIX AND ASSET ALLOCATION
August 2007: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern
There have been three prior Trigger Events (data from Yahoo Finance):
1987 Trigger Event (based on volatility for S & P 100-VXO-VIX Data Starts in 1990)
October 1997 Trigger Event (not resolved until later part of 2003, confirmed in October 1998)
The Unstable VIX Pattern is what happens after the Trigger Event. This pattern will be a dangerous and difficult market for the individual to navigate. There will generally be a lot of volatile up and down movement in stocks, with the end result being a long period of going nowhere. Going nowhere on a roller coaster is also the hallmark characteristic of a long term bear market, where the buy and hold investor in an S & P 500 Index would likely lose principal after adjusting for inflation even with dividends reinvested. I started to invest in the late 1960s. The annualized total return (dividends reinvested) of the S & P 500 from January 1966 through July 1982 was -1.813% Adjusted for Inflation and before taxes. That is an annualized loss. Dividends back then were taxed at the highest marginal ordinary income rate.
The long term bear market can last for 15 or more years. The Vix Model is a shorter term signal and its signals can be given in long term structural bull and bear markets.
Phase 1 of the Unstable VIX Pattern will be market by repetitive movement in the VIX between 20 to 30, with temporary spurts to over 30 and below 20. A potentially more ominous pattern, Phase 2, would be a burst into the 40s that could lead to even further elevation into the 50s and beyond, which would be associated with catastrophic stock market losses similar to what happened after the Lehman failure in September 2008. There was a Phase 2 formation in late September 2008 that gave investors two days warning to get out. SEPTEMBER 2008: FORMATION OF THE DEADLY PHASE 2 OF THE UNSTABLE VIX PATTERN The operative word after a Phase 2 signal is caution.
The Unstable VIX Pattern, Phases 1 and 2, can last for a very long time. The one decision investor could just sit it out in five year treasury notes, rolling them over if necessary, and save themselves a lot of heartburn. Historically, it would be difficult for a skilled trader to navigate the Unstable VIX Pattern to beat the return of a five year treasury note.
The more adventuresome investor, such as myself, will play the volatility with the substantial cash raised after the First Trigger Event. Generally, this will be a mechanical trading strategy. During Phase 1, stocks are sold when the VIX moves below 20 and hedges are bought for the stocks that are kept.
When the VIX spikes toward 30 or over, stocks are bought again and the hedges are sold. This will work until Phase 2 comes around which may never happen. It did happen in September 2008. Then the investor following this path, which included me, would likely have no hedges, having sold them when the VIX spiked to the low 30s or high 20s, and would have added some stock positions back. Then, an adjustment has to be made when it becomes apparent that a Phase 2 of the Unstable VIX Pattern has formed, with the recognition that danger lurks at ever corner.
If I bought good companies when their price had fallen to reasonable levels for a long term holder, I can become a long term holder, start reinvesting the dividends, and potentially buy more shares during this catastrophic phase of the Unstable Vix Pattern with the cash stash. I could then wait for the movement to below 20 in the VIX and then decide what to do with the position added just prior to the Phase 2, Unstable VIX Pattern formation coming out of a long standing Phase 1 pattern. Trading and Asset Allocation in Stable and Unstable VIX Pattern; More on VIX AND ASSET ALLOCATION; Stable and Unstable VIX Patterns Impacting Changes in Allocation to Stocks, Bonds and Cash (November 2008 Post). In the case of my PEP shares, I was able to sell those shares before a significant price drop and then buy them back after the price fell over $20. Volatility, Catastrophic Event Formation, Asset Allocation Decision for Pepsi September 2008
When the catastrophic event formation occurred in September 2008, the Phase 1 Unstable Pattern had been in force since August 2007, and I could trade that pattern based on the movement in the VIX until Phase 2 emerged, and then there is no guidance from the model. The crap has hit the fan.
As shown in great detail in this blog, I carefully deployed cash flow to buy mostly income producing stocks that appeared to present good values during the September 2008 to March 2009 period, and this worked out just fine. It may not the next time. The Great Depression Part Two was avoided by the efforts of governments around the world.
Green Light: During an Unstable VIX Pattern, the VIX will periodically move below 20. A Stable VIX Pattern is not formed until there is continuous movement in the VIX below 20 for 3 months. Some minor movement above 20 is allowed without restarting the count.
Green Light Signals:
May 1991 and Terminated by Trigger Event October 1997: VIX and S & P Compared 1990 to 1997
January 2004 and Terminated by Trigger Event August 2007: More on VIX AND ASSET ALLOCATION
September 2012 - Stable Vix Pattern as of 9/26/12
Disclaimer: I am not a financial advisor, but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sale of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals, and situational risks. I can only make that kind of assessment for myself and my family members.
Thanks for reposting this. I backtested when first seeing your posts about it. It held up in my backtesting.
ReplyDeleteMany investors were encouraged last Friday that the S&P 500 index bounced off its 200 day SMA line.
ReplyDeleteUsing a 1 year Yahoo Finance chart, the SMA line was at 5,733.1.
In pre-market trading today (3/10), this index is at 5,694.5 as of 7:50 A.M. CDT. A significant breach of that line may result in downside selling pressure.
A Trigger Event in the VIX Model may form soon that ushers in an Unstable Vix Pattern, a more dicey environment for stock investors.
My stock allocation is less than 10% of my total brokerage assets. So even if a consider to reduce signal is sent by the VIX Model, and confirmed by a 5% decline below the S&P 500 200 day SMA, I am not likely to do anything since I am already in my bunker waiting for incoming.
The Vix Model is based on past historical patterns. One of those patterns is that there is a Recovery Period after a Trigger Event where the VIX returns briefly to below 20 movement and the S&P 500 index is in a rally mode (as was the case after the August 2007 Trigger Event with the Recovery Period lasting into October 2007). The Recovery Period, when it happens, would provide a better opportunity to lighten up than selling during the Trigger Event when stocks are in a free fall.
I was just wondering this stuff. Are we on day 6 of Vix above 20?
ReplyDeleteLike usual I didn't chase (sold) on the way down which would have been helpful if I had. But now I'll wait for a recovery event. What's complicating it is that the recovery event is based on investor optimism about some negative event. The thing that's the negative event still is talking, so I'm not sure how likely a recovery event is.
I read but wanted to reread the other post about investment options... A lot to process and think about!
Land: There are no days yet in the Trigger Event count. The days have to be with VIX closes at or above 25. Today may be the first day of the count. The VIX is currently at 26.4.
DeleteThe reason for requiring high closes over several days is based on history and was designed to lessen the chance of a false signal.
When I first opened a long term VIX chart early in 2007, the patterns jumped off the page immediately.
Some signals will be stronger than others. The August 2007 Trigger Event had multiple Confirmation Events before the bottom fell out.
The Trigger Event before the 1987 crash had more days in the count than the one in August 2007. For 1987, I had to use the volatility index for the S&P 100 since the VIX data starts in 1990. The same pattern held up using the S&P 100 volatility data.
Thanks!
ReplyDeleteCboe Volatility Index
ReplyDeleteClose at 27.86 + 4.49 +19.21%
https://www.marketwatch.com/investing/index/vix
Day 1 - Trigger Event Count
I did do some selling into an early morning rally where the stock was up 2% or more. Most of my early morning stock gains faded as the market dived into the close. Nothing much will escape this kind of downturn but I did still have several bond like stocks remain in positive territory.
As expected, the decline accelerated when it became apparent to traders that the S&P 500 was not going to rally above its 200 day SMA line.
S&P 500 Index
5,614.56 -155.64 -2.70%
200 Day SMA Line Break at 5734.63 (using a 1 year Yahoo Finance chart)
50 Day SMA Line at 5,917.12, pierced to the downside with gusto on 2/24/25.
Thanks for the update!
ReplyDeleteI haven't done any buying or selling. My account is definitely suffering. But hopefully since I've been waiting for an opportunity to buy, this will lead to one without actually leading to a long-term recession.
Land: I will need more economic data before I can reach an opinion on whether a recession is on the near horizon.
ReplyDeleteTariffs will cause major price spikes in products that are already expensive and that will have a substantial negative impact on revenues for several major economic sectors including autos and construction.
The 25% tariffs on all aluminum and steel imports, which will start tomorrow, will have a significant inflationary impact on heavy domestic users of those metals. Those tariffs will also allow domestic producers to significantly raise prices as well. This is what actually has happened in the past.
Trump has temporarily delayed his 25% tariff taxes on imports from Mexico and Canada for products that are entitled to no tariff treatment under the trade treaty that he negotiated, but that expires on 4/2. Those products include car parts used in U.S. manufacturing as well as cars and trucks sold to U.S. customers. The end result of all of these tariffs including the ones taking effect tomorrow will be about a $6,000 to $8,000 price increase in new vehicle sales, but that will take a few months to show up. When the price increases are factored into newly manufactured vehicles, this will result in fewer vehicle sales that will lead to layoffs in the auto industry, both the major car companies and the host of companies that supply products to them.
In several recent VIX spike periods, I have added to my stock positions but I am in a wait and see mode now since there is at least a possibility that a major recession will be caused by Trump and his party that will lead to much lower equity prices.
It looks like there may be a rally. I'm waiting to see. So is everybody else.
ReplyDeleteI'm going to sell into it.
The tariff announcements are causing distress for good reason. Even if he rolls it back, I don't know what's next.
The lawsuit won by employees, requiring several government agencies to rehire what they just fired, may have been the trigger for Friday's rally. That should help the economy better than firing them. Hard to say If this will be the final word or everyone will get fired again under some other excuse.
Land: I view it as unlikely that the rally last Friday (3/14/25) was related to any external event happening that day.
DeleteThe rally was probably just a technical rebound from short term oversold conditions. The S&P 500 index closed at 5,770.2 on Friday 3/7 and at 5,638.54 last Friday or down -2.28% for the week after the +2.13% rally. The recent high was at 6,147.43 on 2/19/25.
I read the judge’s opinion about the firings and agree that Trump fired them unlawfully based on the legal requirements discussed in the opinion. He deliberately ignored all of those requirements in firing the federal employees.
Trump has repeatedly violated laws on other matters as well, including impounding funds authorized by congress by executive order and even eliminating entire programs by executive fiat (e.g. refusal to follow The Impoundment Control Act of 1974). All of Trump’s law violations to date are consistent with the exercise of unrestrained dictatorial powers.
Trump is testing a legal theory that he has absolute control over the Executive branch and can do whatever he wants to do as President, without adhering to any law, including those passed by Congress and signed into law by prior Presidents, or regulation that restrains even in the slightest way that power.
Trump understands that the 6 Republican Justices, who are the most supportive Supreme Court in U.S. history to growing the uncheckable powers of the Imperial Presidency, have unleashed him, and there is no meaningful restraint left until the next Presidential election.
Yes, the lack of restraint is unprecedented and out of control.
DeleteIn the DMV area everyone knows someone who's lost a job. Useful facilities like museums and national parks and so much more and getting impacted. Everyone counting on help from medical research, too.
Along with all that I've heard varied assessments of whether Schumer was right that a vote to allow a government shutdown would leave only the executive branch open with no check and balance on Trump's behavior. True and dangerous or not true and a shutdown would hurt Trump's image?
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It certainly seemed like time for a bounce. What indicates oversold at those prices? It's already well below the 200day MA so I missed the oversold signals. (Unless it was merely the feel of stretched enough.)
Land: I view the stock market to be in a equilibrium state waiting for more material news on tariffs and consumers spending.
DeleteNKE mentioned that tariffs would be negatively impacting its business, lowering its margins. More announcements along those lines will at some point impact valuations of stocks beyond those who are admitting to margin compression.
Nike Inc. Cl B
$67.85 -$4.01 -5.58%
Last Updated: Mar 21, 2025 at 3:30 p.m. EDT
https://www.marketwatch.com/investing/stock/nke
FedEx gave an earnings warning yesterday.
$230.57 -$15.89 -6.46%
https://www.marketwatch.com/investing/stock/fdx?mod=search_symbol
Accenture stated earlier this week that its business may be hurt by cancellation of government contracts.
General Mills noted in its report that consumers were spending less money on snacks which I would anticipate to be an early casualty of consumer spending similar to dining out in that respect. Those news items this week are consistent with the thesis that the economy is slowing for a variety of reasons, but not enough yet to cause a major decline in stocks.
The Stock Jocks are more concerned about consumer spending and Trump tariff war than they were in in January through mid-February and that concern is reflected in the dip from the mid-February all time high in the S&P 500.
Before taking the stock market down another 5% or more, I suspect that they will need more concrete news IMO that consumers are meaningfully reducing spending and the tariff war is expanding with no reasonable hope for a quick resolution. Trump is scheduled to implement widespread retaliatory tariffs on 4/2 and that may set the directional movement of the stock market along with other hard data on consumer spending. The soft data are the surveys on consumer confidence and sentiment.
The surveys are soft data, but the companies are more concrete data or at least data from observation.
DeleteI thought the market is usually predictive rather than trailing on changes in GDP and consumer spending.
I wonder if the boycott of the bigger stores is going to distort the numbers, to add to the lack of clarity. Target, Walmart, Amazon and a few others.
DeleteLand: To the extent that there are some retailer boycotts, I doubt the dollar amounts are significant and become even less so when the consumer simply buys a product from another retailer or substitutes one product for another that is subject to the consumer's boycott (e.g. boycott of new Tesla purchase but stills buys an electric auto)
DeleteThe issue is whether there are forces coalescing that will cause a significant drop in consumer spending particularly on discretionary purchases including major items like a new car when the existing one works just fine (e.g. my 2007 Saturn Aura, last car purchase, and my mint condition 1987 Mercedes 260E).
Land: Stock investors try to predict the future when valuing stocks but that crowd sourced consensus opinion has issues.
DeleteThe first is that the default future forecast is blue sky most of the time, and it takes a great deal of contradictory information to change that forecast.
The second is that it has not paid in the past to predict a bear market (20+%) or catastrophic decline (40%+) based on a fear that something really bad is about to happen.
Resistance to acting upon adverse developments is strong. An example is how stock investors started to react to news stories in early 2007 to rapidly rising defaults in ALT-A and subprime home loans. After about 8 months of news confirming a major problem, there was a Trigger Event in August 2007 in the VIX Model but then a recovery to new highs in October 2007 before the bottom fell out later in 2008 when the really bad news events could no longer be ignored in making future predictions about stocks.
Trump is mostly unpredictable which is a third reason why investors are not factoring in a tariff war and other policies that will add inflationary pressures and lower real GDP growth this year and 2026, if continued.
Trump is predictable only when forecasting that he will rarely make accurate statements and will exercise dictatorial powers inconsistent with the laws and traditions in the U.S.
More hard data is needed to make an assessment on whether consumers are reducing their spending in an sufficient amount to trigger a recession or barely positive real GDP growth. If the data remains weak through the spring, the weather explanation for weaker spending can be dismissed.
I can say that conditions are ripe IMO for a major pullback including (1) the existing household debt levels including high cost credit card debt; (2) the significant squeeze on discretionary spending already caused by inflation starting in 2021; (3) a potential bear market in stocks that will restrain spending among many households in the top 10% who are powering consumer spending numbers now; and (4) rising unemployment numbers throughout 2025 causing many to restrain discretionary spending who are still employed due to a growing fear of losing their jobs.
I got distracted for a minute as I was reading, by the cars. I loved my Saturn. Do you have a picture of the mint Mercedes? Is that a rotary engine still? My dad had an 87 Mazda RX7 that was a rotary engine.
DeleteLand: I posted a picture of the 1987 Mercedes in my last blog post, near the end:
Deletehttps://tennesseeindependent.blogspot.com/2025/03/monthly-update-31825.html
It's a helpful explanation.
DeleteThe blue skies forever was what I was pondering. Seems to me we're either going to reduced GDP or recession. Not sure about the recession, but even a reduced GDP should lead to lower stock valuations.
My instincts are not blue skies forever. I remember prior crashes. So I've been having a hard time with how hesitant the market's been to believe. Powell too with his transient idea. Transient stuff still affects other stuff (less consumer spending) and that creates a longer-term effect....
I didn't know weather was being used as an excuse for less spending. There's nothing particularly unusual about the weather where I am or anywhere on the east coast that I know of. West Coast fires would cause more spending as people try to recoup their lives.
I'm not willing to sell now that it's down, I'm going to wait for a rebound. Hopefully not miss that. Because I like to go back to my plan of getting out at least of the small cap.
Underlying the bigger crashes, has been often greed or corruption. I have been looking for what might be coming up. I think Trump decision making may count.
Is resale spending calculated off of places like Target and Walmart, and therefore the numbers would be distorted... Or off of sales by MasterCard and Visa?
DeleteI bought some storm door clips from a true value hardware store in the middle of the country, rather than Amazon. That's the kind of thing that I wonder if it gets counted?
Granted I'm not a spender so for me the example is storm door clips but other people spend more.
Land: It is my understanding that the Census Bureau conducts surveys of both store and online retailers when preparing its monthly retail sales report. A questionnaire is sent out to above 4,800 retailers.
Deletehttps://www.census.gov/retail/sales.html
At that website, there is a link to "Advance Monthly Retail Trade Report Tables" The categories include nonstore retailers and various categories of stores (e.g. grocery, auto, furniture, electronics, alcohol, general merchandise, pharmacies, etc.)
Oh cool, good info on where they get that.
DeleteA lot of the shift is going to be to stores that are still counted.
Land: Powell did use the "transitory" word again to describe the inflationary impact of tariffs.
Deletehttps://www.cnbc.com/2025/03/19/transitory-is-back-as-the-fed-doesnt-expect-tariffs-to-have-long-lasting-inflation-impacts.html
Tariffs will cause mostly a one time hit to inflation, though some companies may ease into a price increase caused by a 25% tariff before recouping all of it later.
The problem with saying the inflationary impact is transitory is that it does not take into account how significant price inflation impacts consumer spending particularly after a long period of relatively high inflation.
The estimates on a new car price range from $6,000 to $8000 resulting from the 25% tariff on all aluminum and steel imports + the 25% tariffs on USMCA compliant car, truck and auto parts from Canada and Mexico. Trump has temporarily delayed the later tariffs which, when imposed, would violate the USMCA trade agreement that he negotiated and signed.
That kind of price increase will cause far fewer sales of new cars and trucks, more auto and related company layoffs, and lower GDP growth along with higher inflation and, along with a spike in new home construction costs, would make a recession far more likely IMO.
A number of products used in new construction are already seeing significant price increases even when the tariff has not yet been imposed:
"Tariff fears are raising construction costs by up to 20%, says Related Group CEO"
https://www.cnbc.com/2025/03/21/related-group-ceo-tariff-fears-raising-construction-costs.html
Homebuilders like to use soft Canadian lumber and those imports are already subject to high tariffs.
" Trump Imposes Additional 25% Tariff on Canadian Softwood Lumber"
https://www.nahb.org/blog/2025/02/trump-imposes-tariff-on-lumber
I do not believe that tariff increase was delayed by Trump. The 30 day delay was only for USMCA compliant products.
The magnitude of price increases which will start soon will inevitably result in lower consumer demand in major economic sectors. The question IMO is not whether that will happen after the price increases caused by Trump's tariff taxes but only whether proceeds with the Tariff War as threatened.
Trump seems to believe himself that tariffs are needed because the US has been ripped off for years. I haven't seen any reeling in.
DeleteLand: The stock market is in a rally mode this morning based on a WSJ report that Trump will exclude autos/auto parts from his tariff taxes and limit the retaliatory tariff taxes to those countries with the largest trade deficits. The later claim is so indefinite as to lack substance.
DeleteExcluding U.S. tariff taxes on autos and auto parts imports from Canada and Mexico, which are USMCA compliant, only means that Trump will not violate the trade treaty that he negotiated and signed during his first term.
Any story that indicates that he will not follow through with all of his tariff threats is likely to lead to a market rally, at least on a temporary basis.
I am still in a wait and see mode.
I mentioned in a prior comment that Trump was unpredictable on whether he will carry through with all of his tariff threats.
It was only predictable that the repercussions would be a major negative for the both the U.S. and other economies when and if he implemented all of his threats. And that issue is still an open one IMO.
The purpose of Trump's tariff taxes are to bring more manufacturing jobs back to the U.S.. The U.S. economy is heavily concentrated in service jobs.
Total Private Sector 132.520M (non-seasonally adjusted)
Total Private Service Sector: 111.265M
https://www.bls.gov/news.release/archives/empsit_03072025.htm
The cost of that effort, when and if successful, will be higher inflation for all U.S. households. There is a trade off which Trump and his party are not explaining to voters. Using tariff taxes, which is a regressive tax similar to sales taxes, to bring back a few thousand manufacturing jobs will cause far more harm than good.
I saw a comment that the rally was optimism about Russia coming to the negotiation table. That didn't even make sense.
DeleteThe rally over this makes a lot more sense.
So he is backing down on little bits of his tariffs. I don't see full restraint because he is sure about this approach.
Wonder if somebody explained to him that he already had an agreement and treaty on these parts.
In a recent news conference with President Macron, Trump made this claim about the USMCA trade agreement that he negotiated and signed:
Delete"Anybody that would agree to allow this to happen to our country should be ashamed of themselves."
When he signed the USMCA trade agreement, Trump made this claim: The USMCA is “the largest most significant modern and balanced trade agreement in history. All of our countries will benefit greatly. It is probably the largest trade deal ever made also."
It remains to be seen whether Trump will actually implement tariff taxes inconsistent with U.S. treaty obligations under USMCA.
Oh my.
DeleteListening to Powell on Bloomberg.
ReplyDeleteYikes
"There's an inertia to make changes"
...so he's more hawkish than the dot chart?
"Inflation from trade war could be transitory"
...didn't fed do this once already, hum
All of the #s are slightly hawish with tariffs yet to impact. To me that's a slowdown or stagflation. I'm sticking to caution for now.
Meanwhile the market likes the reduction in uncertainty about what the fed would do and thinks.
I'm confused on buying less bonds back. That's an effect similar to "not lowering rates." But my logic is thinking less buy back is like providing more liquidity, and that'd be doveish. There's something off in my thinking.
Land: The Federal Reserve still owns $6.339+ trillion in treasuries and mortgage backed securities.
Deletehttps://www.newyorkfed.org/markets/soma-holdings
During the extended Q/E period, the federal reserve created money to buy those securities which lowered interest rates and increased the supply of money that provides more liquidity to the banking system. By reinvesting more of the matured treasury proceeds, allowing only a maximum $5B per month to runoff the balance sheet, down from $25, there is less quantitative tightening and less upside pressure on longer term rates with the FED still being a major buyer of treasuries. It is a form of monetary easing short of cutting the FF rate again.
There are some who argue that the FED is still in a quantitative easing mode even before this announcement today:
https://www.calculatedriskblog.com/2025/03/lawler-some-observations-on-federal.html
The takeaway for me is that 2 rate cuts are still on the table. If both occur before year end, the the FF range going into 2026 will be 3.75% to 4%, down from the current 4.25-4.5%, and that will result in a roughly equivalent decline in MM and other short term yields including T Bills and CDs.
I did buy some corporate bonds earlier today before the Fed announcement. The ask prices moved up .3 or .4 after the announcement. (e.g. bought at 97.8 and now at 98.2)
There was also a material lowering of the estimate for 2025 real GDP growth to 1.7% down 2.1% and a jump in the estimate for core PCE inflation to 2.8% from 2.5%.
https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20250319.htm
"It is a form of monetary easing short of cutting the FF rate again."
DeleteThank you!!
So it's what I thought. I've been so confused listening to news because this doesn't get factored in as they assess whether Powell was hawkish.
Staying the same while GDP slows and inflation grows, is hawkish... but the Fed also made this big change that's an easing!
That's pretty! I like the color a lot.
ReplyDeleteI have some catch up to do still on that post and the videos.
The VIX remains in a Stable Vix Pattern. A Trigger Event requires multiple closes above 25. During the most recent VIX spike over 20, there was only 2 closes above 25.
ReplyDeleteThe VIX has now closed below 20 for 5 consecutive days and at 17.4 yesterday. This movement is sufficient for me to remove both closes above 25 from the Trigger Event day count. The next surge above 25 will consequently be a new day 1.
Cboe Volatility Index (VIX)
ReplyDeleteClose on 4/3/25: 30.02 +8.51 +39.56%
This is the first day in a Trigger Event count. Multiple days must occur for the TE to form that ends the Stable Vix Pattern and ushers in a more dicey stock market with far more volatility, a roller coaster ride up and down with that movement staying below the peak S&P 500 levels hit during the Stable VIX Pattern which was 6,147.43 hit intraday on 2/19/25.
If a Trigger Event is formed, then there may be a better opportunity to lighten up during what I call the Recovery Period when there is a temporary return to below 20 movement. An example is the market rally into October 2007 after the dip associated with the August 2007 Trigger Event. This may or may not happen in the future even though it has occurred in the past.
Another negative technical indicator is that the S&P 500 has a robust movement below its 200 day SMA line which is at 5,762 using a 1 year YF chart. The close today was at 5,396.52 or 6.34% below the 200 day SMA point. I view a close more than 5% below the 200 day SMA to be an additional negative indicator.
Another negative indicator IMO is that the S&P 500 broke through its 200 day line on 3/7/25 but managed to rally and close slightly above the line on 3/24-25 before collapsing again.
The S&P 500 is substantially below its 50 day SMA line of 5,865.01.
None of this impacts me much since my stock allocation is near 8% of total assets held in brokerage accounts and my bonds were up nicely today.
Cboe Volatility Index
ReplyDeleteClose on 4/4:
45.31 +15.29 +50.93%
https://www.marketwatch.com/investing/index/vix?mod=home_markets
Close 4/2/25 at 30.02, up from 21.51 the prior day.
It is probable now that there will be a Trigger Event as defined in the Vix Model.
The day count is now at 2.
While there may be an attempt at a rally next week, comments made by Trump and Bessent (the failed hedge fund manager who is now Treasury Secretary) over the weekend indicate that Trump intends to stay the course on tariffs.
https://www.cnbc.com/2025/04/06/treasury-secretary-scott-bessent-markets-tariffs-recession.html
If there is a rally next week, before the trigger event is fully formed, would you consider that the recovery period to the trigger event?
ReplyDeleteLand: By definition in the Model, the Recovery Period may occur only after a Trigger Event is formed which will provide a better opportunity to lighten up on stocks then during the Trigger Event period. The Recovery Period is a return to movement below 20 predicted to be temporary in the Model for as long as the Unstable Vix Pattern, created by the Trigger Event, continues.
DeleteAs a practical matter, a massive stock market rally starting next week before a Trigger Event forms could be viewed as providing a similar opportunity to lighten up with the market staying volatile.
I am anticipating that I will do more small ball scattershot buying of dividend paying stocks next week assuming there is no significant rally, with the amounts being determined by how much further the market falls.
"Will Start Gingerly Buying Dividend Stocks Next Week as Bond YIelds Become Less Attractive to me"
https://www.youtube.com/watch?v=mMwL68HRUJI&t=102s
I am declaring a Trigger Event in my Vix Model that ushers in the Unstable Vix Pattern based on the following VIX closings:
ReplyDeleteApr 10, 2025 40.72
Apr 9, 2025 33.62
Apr 8, 2025 52.33
Apr 7, 2025 46.98
Apr 4, 2025 45.31
Apr 3, 2025 30.02
The intraday high during this 6 day period was at 60.13.
A possible Catastrophic Event, as defined in the Model, is possible with this kind of formation. An example is what happened in the VIX and the stock market in October 2008.
I doubt that the Stock Jocks are ready to throw in the towel and that will historically lead to a Recovery Period when the stock market rallies until the VIX falls below 20 movement which will be temporary for as long as the Unstable Vix Pattern exists with its whipsaw movement below 20 and then spikes higher.
It's exciting to see the model in action. (Except for the part where stock prices are going down.)
ReplyDeleteQ1
I think originally you had 8 as the count. I saw that was no longer there when you reposted the model. Of course I could be misremembering!
Is it the 5% below 200 moving day average in a very solid way.... Plus the existential problem that the situation triggering it is very evident and not going away.... A part of the decision that six vix over 30 qualifies as a trigger event?
Q2
The recovery period normally follows the trigger period If I'm remembering? (Not that it follows the catastrophic event.)
If there is one this time, I'll be selling into it.
Land: The August 2007 Trigger Event had 8 VIX closes above 25 but the highest was at 30.83 and 5 were between 25.05 to 28.04.
DeleteThe VIX Model is largely mechanical devoid of human interpretation until a judgment has to be made on the day count for a Trigger Event. When the movement above 25 is not that high, I will require 8 days. I will reduce it to 6 when there are several extreme numbers like 1 close over 50 and 2 closes over 40.
China increased its tariff on U.S. exports to 125%.
The current U.S. and China tariffs on each others exports will stop almost all trade between the two countries. It does not matter now whether China goes up to 150 or 200% or the U.S. goes higher than 145%. Trade will stop at the current level as soon as goods in transit clear from customs.
China will be able to weather the loss of exports to the U.S. by stimulating domestic demand and to a lesser extent exporting more to non-hostile countries who are not joining the solitary tariff war started by the U.S..
After 30 days or so, U.S. will be collecting almost no tariffs taxes on China's exports. All farm exports to China will stop. U.S. supply chains dependent on China's exports will have difficulty finding replacements and any replacements found will cost a lot more.
China's trade relationships among America's former allies in western democracies, particularly those in Asia, will improve dramatically as more countries reduce their reliance on an increasing erratic, hostile, bullying, and irrational U.S. government who only insults them.
The Stock Jocks may be relieved some that China has not yet taken any retaliation to Trump's latest tariff increase other than to raise its tariffs on U.S. exports. There are far more damaging actions that it could have taken in response.
The USD's value against a basket of foreign country currencies continues to decline significantly:
U.S. Dollar Index (DXY)
99.50 -1.37 -1.36%
Last Updated: Apr 11, 2025 at 9:05 a.m. EDT
https://www.marketwatch.com/investing/index/dxy?mod=home_markets
Land: As defined in the Vix Model, the Recovery Period has historically occurred after a Trigger Event. The causes of the TE still exist. Investors may be in denial, or are simply buying the dip again which has worked in the past, or have no idea about a fundamental change in the economy that will cause stock valuations to reset at lower levels. Stocks move higher in response to that buying and the VIX returns to below 20 movement.
ReplyDeleteThis model is not making a prediction about the S&P 500 index level long term, but is a cyclical and a relatively short term indicator. The historical pattern after a Trigger Event indicates that the S&P 500 will be far more volatile until the Stable VIX Pattern starts to form, marked by strong up and down moves going nowhere over a significant period of time, with the VIX swinging wildly below 20 for a short period and then spiking into the high 20s and 30s, back and forth. That whipsaw action may be interrupted by a Catastrophic Event as defined in the Model where the VIX goes into the 60s or higher for multiple days, possibly accelerating to 100 or more, that would be associated with substantial declines in the S&P 500.
The following are the VIX closes in October 2008:
Oct 30, 2008 62.9
Oct 29, 2008 69.96
Oct 28, 2008 66.96
Oct 27, 2008 80.06
Oct 24, 2008 79.13
Oct 23, 2008 67.80
Oct 22, 2008 69.65
Oct 21, 2008 53.11
Oct 20, 2008 52.97
Oct 17, 2008 70.33
Oct 16, 2008 67.61
Oct 15, 2008 69.25
Oct 14, 2008 55.13
Oct 13, 2008 54.99
Oct 10, 2008 69.95
Oct 9, 2008 63.92
Oct 8, 2008 57.53
Oct 7, 2008 53.68
Oct 6, 2008 52.05
Oct 3, 2008 45.14
Oct 2, 2008 45.26
Oct 1, 2008 39.81
S&P 500 Decline Staring 9/30/08 through 10/30/08 (last trading day) = 18.2%
The S&P 500 closed at 950.09 on 10/30/08
The high volatility numbers continued with the S&P falling to a closing low at 676.53 on 3/9/2009, intraday low at 666.79 on 3/6.
Thank you for the explanations!
ReplyDeleteLand: There could be a powerful stock market rally if Trump decided to backtrack on the 145% tariff on China to no more than 20% on all items other than steel and aluminum at 25%.
DeleteThis is a link to a video of President Reagan talking about 10 reasons why tariffs are a bad economic idea:
https://www.youtube.com/watch?v=gFMyB8WMuDU
I doubt that most republicans today have even heard of the Smoot Hawley Tariff Act, passed by the republicans and signed into law by President Hoover in June 1930, but that is the first reason cited by Reagan why that should never happen again but is nonetheless happening now.