The Time is Now for a Systemic Market Hedge

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The dynamics between the VIX and the S&P 500 last year marks a gateway to an impending crisis.i Declining markets with a nervous, range-bound VIX between 20 and 35, as we experienced in 2022 and into this year, have occurred repeatedly in the past. In each case, they preceded second-leg crises with VIX spiking to well above 35 – when most of the value destruction occurred. A range-bound VIX between 20-35 has common markers and dynamics which signal a “crisis gateway” that deserves a defensive posture.

Last year, 2022, was a challenging period for passive allocations to U.S. equities generally and to the S&P 500 in particular, which ground down 24.5% through October 12th from the market peak on January 3rd before regaining its tenuous footing into the first quarter of 2023. As of March 31, 2023, the S&P 500 was down 12.5% from its prior peak, having retraced about 50% of its losses. During this period, the VIX remained rangebound between 20-35, which indicated a transitioning market. Not all transition VIX markets are followed by crises, but there is a high probability that the current declining transition market off its high will become a crisis.