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Key Technical Risk Indicators (KTRIs)

In a large corporation Key Risk Indicators (KRIs) are often used to evaluate adverse events that can materially impact the financial health of the company. These metrics can help risk managers monitor changes in risk levels and allow for early warning signs to prevent a situation from escalating into a major crisis.


From a technical perspective, there are Key Technical Risk Indicators (KTRIs) that are deployed to help monitor the technical health of the securities, markets, industries in question. Understanding the KTRIs offers useful insights about potential risks and most importantly, allows the investors to act in an informative and confident way as it relates to the investment decision making process.


Although there are many KTRIs available the following are some of the more popular indicators that have proven to be useful: Implied Volatility (VIX), US fixed income (10-year US Treasury yield – TNX), US currency (US Dollar Index – USD), Commodities (Gold futures – GOLD), and Consumer Staples/Consumer Cyclical ratio (XLY/XLP).


S&P 500 Implied Volatility Index (VIX)


VIX (41.38) or the S&P 500 Implied Volatility Index recently traded to a high of 85.47 (3/18/20) or just below the Oct 2008 high (89.53). This fear indicator showed extreme fear as last witnessed during the height of the global financial crisis (Oct 2018) or soon after Lehman Brothers filed for bankruptcy (9/15/08). Despite recording an internal VIX high in Oct 2008, SPX continued to decline for another 5-months until bottoming in Mar 2009 (666.79). After setting a reaction high on Oct 2008 (89.53) VIX established a series of lower-highs including Nov 2008 (81.48), Dec 2008 (68.60), and Mar 2009 (53.25). Fast forward today, we are encouraged by the potential for lower-high at 85.47/60.59 (Mar/Apr 2020). However, VIX trading at the current level of 41.38 still warns of fears/concerns. If VIX can maintain a series of lower-highs and fall below 36-36.5 (Dec 2018 high) this may trigger the next move to 28-31, and below this to 23-24.5. Stabilization of VIX or fear will lead to sideline money returning to equities (SPX).


The monthly SPX line chart shows key technical supports residing near the Dec 2018/Mar higher-low monthly close (2,506.85/2,584.59) as well as the 2009 uptrend (2,675). SPX must not violate these key supports on a monthly closing basis. The ability to maintain above these supports can extend the current oversold rally to key intermediate-term resistance at 2,824-2,946 (Jan/Sep 2018 and Apr 2019 highs). A convincing breakout negates a head/shoulders top and confirms the resumption of the 2009 primary uptrend.


10-year US Treasury Yield (TNX)


Over the past 50-years the10-year US Treasury Yield (TNX) has been confined to a well-defined secular/structural downtrend channel. The monthly Rate of Change (ROC) indicator has also been reliable in signaling major bottoms in yields. However, the 50-year relationship between TNX and ROC indicator have visibly diverged from each other in the past few months. That is, ROC indicator has plummeted below the bottom of its very long-term oversold support zone. Dramatically lower yields are typically a sign of risk aversion as global investors seek the safety of the long-end of the US yield curve. However, it is unusual to witness TNX falling so far below the bottom of its monthly ROC oversold support level. TNX must not fall below its Mar 2020 reaction low of 0.398% or this will signal signs of market distress as this warns the next move toward 0.0% and possibly to negative rates.


US Dollar Index (USD)


The currency market is an important asset class that is often used in a top-down analysis to identify the inter-relationship of other key financial assets (i.e., Commodities, Fixed Income, and Equities). It is also a global safe-haven asset that tends to perform well during major market turmoil. US Dollar Index (USD) is attempting to break out above key intermediate-term resistance at 103.82-103.96 (Jan 2017 and Mar 2020 highs). A convincing breakout suggests +15.81 points or an intermediate-term USD target to 119.77-121.21. On the downside, failure to surpass 103.82-103.96 can lead to consolidation to key initial support in the mid-90s (Mar 2020 lows), and below this to 88.15-91.88 (Apr 2016 and Feb 2018 lows).


Gold Futures (GOLD)


Gold is considered to be the purest form of a hard asset. Investors tend to turn to gold during periods of market uncertainties. This commodity is also used as a defensive hedge to offset some of the risks associated with higher-beta financial assets (i.e., Equities). Gold is attempting to break out above key intermediate-term resistance at 103.82-103.96 (Jan 2017 and Mar 2020 highs). A convincing breakout suggests +15.81 points or an intermediate-term Gold target to 119.77-121.21. On the downside, failure to surpass 103.82-103.96 can lead to consolidation to key initial support in the mid-90s (Mar 2020 lows), and below this to 88.15-91.88 (Apr 2016 and Feb 2018 lows).


Consumer Cyclical versus Consumer Staples ratio (XLY:XLP)


XLY:XLP ratio analysis is an important risk indicator that measures risk-on and risk-off. When XLY:XLP ratio is rising this indicates a more favorable market outlook as investors favor cyclical stocks (i.e., Consumer Discretionary - XLY) over defensive stocks (i.e., Consumer Staples). When XLY:XLP ratio is declining this warns of defensive outlook as investors favor the safety of defensive stocks (i.e., Consumer Staples). XLY:XLP ratio trend has rallied strongly from its Mar 2020 bottom via a higher-low pattern (Mar 2020 low = 1.57 and Apr 2020 low = 1.6696). However, it is now headed toward key initial resistance at 1.913 (late-Mar 2020 highs). A breakout signals the next rally to key intermediate-term resistance at 1.07-2.03 (the extension of the previous triangle breakdown). The ability to convincingly clear above the intermediate-term resistance signals a more positive market outlook and a risk-on market scenario. Failure to breakout warns of a negative market outlook and a risk-off market scenario.


SPX needs to surpass its 200-day ma (3,009) and turn the 200-day ma trend back up to confirm the resumption of a rising intermediate-term uptrend.


Consumer Discretionary sector (XLY) has rallied strongly from the Mar 2020 low. However, it still needs to clear above its declining 200-day ma (118) to signal the next intermediate-term rally.


Consumer Staples sector (XLP) has also rallied from its Mar 2020 low but is now struggling near its 200-day ma (59.94).


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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