Alert! SwanGuard Triggered — Exit Stage Left

A Black Swan Event Has Occurred

We designed our SwanGuard indicator to quickly detect and react to extraordinary market events with the character of (1) Black Monday of 1987, (2) the Flash Crash of 2010, and (3) the Covid Crash of 2020. For SwanGuard to trigger requires (a) an excessive rise in volatility, (b) a high rate of decline in the S&P 500, and (c) a fast flight to safety in Treasuries.

Meanwhile, the markets have continued higher and inflation remains mildly persistent – both apparently buoyed by a combination of federal spending and a race to invest in anything associated with AI.

The sharp market selloff in recent days appears to be broadly spread across world markets and looks like much more than an ordinary dip to buy. While there can be no certainty of its depth or duration, recent events have seriously shifted the odds toward a further decline and recession.

The Moves that Triggered SwanGuard

The VIX quickly went from a placid 15-20 range past 60 before falling back to 30. Although the S&P500 (SPY) had been declining, Friday and Monday were veritable cliffs in comparison. The flight to safety in the 20-year Treasuries in the prior two days sealed the deal for SwanGuard.

The Primary Components of StormGuard

StormGuard’s four primary components include Price Trend, Institutional Momentum, Value Sentiment, and Black Swan Volatility. The first three components had been humming along quite strongly during the AI Tech surge and had only just begun to roll over a bit. StormGuard’s primary job is to detect when markets begin to slowly roll over.

SwanGuard augments StormGuard by providing an escape path for investors when something unexpected suddenly drives marks downward. When the SwanGuard indicator breaks through 20 to the downside, it instantly drives the StormGuard Composite chart to a maximum of -0.5% and selects from a set of US Treasuries. The slower and more general StormGuard will eventually take charge when it catches up with SwanGuard.

Reasons Supporting SwanGuard’s Call

• Poor Economic Data. Employment and manufacturing economic reports disappointed.
• The Middle East is on the brink of a very serious war escalation.
• The Fed’s flawless Sahm Rule Recession indicator (below) now indicates recession territory.
• Warren Buffet is selling tens of billions of dollars worth of Bank of America and Apple stock.
• Japan’s central bank surprisingly raised rates and promised much more to come. It is estimated that there is $2T to $4T of Yen Carry Trade that is quickly being unwound. Because the Japanese lending rates had been so very low for so very long, many investors converted cheap Yen to Dollars or Euros and then invested in the AI story. But now the currency trade, which will evaporate soon, requires paydown in Yen, which requires dollars and thus liquidation of stocks purchased.

All of the signs suggest that it is time to reduce risk.