Flash Crash and Limit Move Warnings - Risk Management with VIX, CVIX, Zig Zag, and Fed Balance Sheet
We are at a point in the volatility cycle where we could see more flashy markets and limit moves. Its not a prediction of a big crash but a warning to manage your risk based on the volatility cycle. We typically see limit moves at this time in the cycle unless the market reverses.
The Zig Zag indicator tells us where we are in the volatility cycle.
The Zig Zag indicator which measures the number of turning points in a day after at least a 1/3rd of 1% move hit its highest level of 80 since the pandemic. The pandemic and the 2008 financial crisis are the only times this indicator was at this level. The Federal Reserve stabilized the market with Quantitative Easing both times. This time the Federal Reserve is using Quantitive Tightening in an effort to tame inflation. The CVIX indicator hit 2.55 today.
The CVIX was at 2.51 on January 24, 2022 in the S&P's biggest reversal day since 2008. The massive liquidation in the crypto market could spill over into the stock market if prices continue lower. There was a VIX Divergence today which is normally bullish with 3 down closes in the VIX and 2 down closes in the S&P and Nasdaq. The Federal Reserve increased its balance sheet by $2 billion this week. It had previously committed to reducing its balance sheet by $95 billion per month starting in May.
Breaking News came out after I made this video - Federal Reserve Chair just stated (to paraphrase) "the Fed was late and should have hiked sooner and the process of getting inflation under control could be painful." "Executing a soft landing may be out of our control." We are programmed to see an accommodative Fed at this point, not a Fed that tightens in a down turn.