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I track a composite market regime score that weights four dimensions: technical momentum, macroeconomic leading indicators, volatility regime, and sentiment. This week it moved into confirmed risk-off territory for the first time since late 2022.
Here is what the current readings look like.
Technical momentum is deteriorating. SPY has made two lower peaks since mid-March and is now more than 9% off its closing high. The 6,500 level held as support through most of Q1, but it has now flipped to resistance.
The macro picture is flashing a stagflation warning. WTI crude is at $102, Brent is above $112, and CPI is running at 2.4% year on year with energy pass-through not yet fully priced in. Powell has explicitly said the Fed will look through the supply shock, which means no rate cut relief is coming in the near term.
The volatility regime is elevated. VIX closed above 30 during Monday's session. Historically, when VIX sustains above 28 to 30, cross-asset correlations break down, and mean-reversion strategies tend to outperform momentum strategies. We are in that zone now.
Sentiment has shifted. Citi cut equity exposure to neutral. JPMorgan revised its S&P year-end target down from 7,500 to 7,200, with a downside scenario of 6,000. Institutional positioning is rotating defensively.
Looking at historical base rates when all four dimensions align risk-off at the same time, comparable periods include the 2022 drawdown, March 2020, Q4 2018, and the 2015 to 2016 correction. The median additional drawdown from the signal date across those periods was around 11.4%. The probability of further decline within 60 days was approximately 73%. Sectors that outperformed during those regimes included Energy, Utilities, Healthcare, and short-duration bonds. Sectors that underperformed included Technology, Consumer Discretionary, and Semiconductors. Micron is already down 30% in eight sessions.
This is not a prediction. Regimes can reverse quickly. In roughly 2 out of 10 historical instances, the signal was a false positive and the market recovered within three weeks. The current geopolitical trigger around the Middle East conflict and the Strait of Hormuz is binary in a way that macro and technical models cannot fully price.
The conditions I am watching for a regime reversal are WTI crude sustained below $90, VIX returning below 20, and SPY reclaiming and holding 6,500.
Not financial advice. Curious whether others are tracking similar signals or seeing divergences in their own frameworks.