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Our Proprietary Indicator: incoming Risk Off for Jan 2024?

I am aware that the narrative on 2024 has shifted. The market thinks we will likely have a soft landing and all of a sudden, many investment research groups are calling to BUY. Don't forget that many were not doing this in October 2023 and caused many to miss one whole month of rally before they started to change their tune. While many were still hesitant about the market, our model was correct in October when the market was still fearing inflation and rising interest rates.

What does it say now that analysts have become more bullish?

Last October, we shared our proprietary indicator that indicated that October onward signaled a risk on for the S&P500. Our indicator is not a technical analysis of the S&P500 itself, but a based on options levels that we think can signal the start of a change of trading regimes. Read the post here:

Here was the exact chart in that post.

The model worked almost perfectly, signaling support for the broad markets for the next two months!

Well, it's the new year now.

We are sharing what our indicator is showing now.

In a nutshell, when the blue line in the 2nd panel cuts above the 0.95 level in combination with the momentum indicator crossing each otherin the 3rd panel, it's a signal that the markets could be in "RISK OFF" mode. In Risk Off mode, the markets will either pullback or be in consolidation. This means it's an excuse for traders to take short term profits, and should look to short rallys.

The model hasn't done it yet, but it might do so soon. So you can say that this is showing an "early" warning that Risk Off might be coming. However, when we combine our indicator with other things we observe in the market, we think Risk Off is highly possible soon. Two of many things I analyze that supports a coming consolidation in the market are:

1.Bonds are selling off. Bond movement is correlated with Stock movements at certain points in the market cycle, especially in early recovery. If bonds have a prolonged sell down, equities will likely follow suit to a degree. Notice the 20-year treasuries finally selling off after more than a 2 month rise.

2. Dumb money has been too optimistic and looks to reverse course.


There are other circumstantial data points that also correlate with coming weakness in the market but I think what we have in the post will suffice.

Personally, I can buy that 2024 will be a bullish year (meaning the end of the year will have a higher price than the beginning of the year), however, that doesn't mean there won't be periods of correction.

Now, the model doesn't tell you how long the correction will be and sometimes there are false positives. However, using the model signal can make more robust other analysis to make investment decisions.

For example, those who went LONG in October and caught the bottom of the recovery need an excuse to SELL and take profit, especially since the fundamental narrative has improved (I know a couple investment houses encouraging investors to get into the market especially small caps.) Hence, once the model hits the signal, it's a good excuse to take profit on stocks that have broken out to big gains, and then take a break to see how big or small the consolidation could be.

Conclusion: Whenever 2nd and 3rd panel has a signal, it typically signals a longer bearish or consolidation move, meaning don't be quick to buy back in if prices start rising. Sell on rises.

For educational purposes only. The signals posted does not prescribe any trading decisions. Consult a financial advisor before initiating any investment or trading decisions.


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