Tactical Investment Strategy 

The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.

Concurrently, the VXV is the CBOE 3-Month Volatility Index, which tracks the implied volatility of S&P 500 Index options with 93 days to expiration.

The VIX/VXV ratio is a metric used in financial analysis, particularly in technical analysis and risk management, to gauge investor sentiment and assess the level of fear or complacency in the market. The ratio compares the volatility of short-term options on the S&P 500 index (represented by the VIX) to the volatility of longer-term options (represented by the VXV). 

During risk-on periods, when investors are more willing to take on risk, a low VIX/VXV ratio may indicate that market participants are less concerned about short-term volatility and are optimistic about the near-term outlook. Traders may interpret this as a bullish signal, expecting stocks to continue rising as investors embrace riskier assets.

Risk-Off: Conversely, during risk-off periods, when investors seek safety and liquidity, a high VIX/VXV ratio may indicate heightened near-term uncertainty and fear in the market. Traders may interpret this as a bearish signal, prompting them to adopt defensive strategies or seek refuge in safe-haven assets.

In summary, the VIX/VXV ratio provides valuable insights into investor sentiment and market dynamics, particularly in assessing near-term volatility expectations and potential shifts in market sentiment during different market environments. It serves as a useful tool for technical analysts and risk managers in gauging market sentiment and making informed trading decisions.

A Simple Moving Average (SMA) is a commonly used technical indicator in financial analysis, particularly in technical analysis. It is calculated by averaging the closing prices of a security or asset over a specific period of time. The SMA smooths out price data by creating a constantly updated average price over the chosen time frame.

SMAs are used to smooth out price fluctuations and identify the direction of the trend. Traders often compare shorter-term SMAs (e.g., 10-day or 20-day) with longer-term SMAs (e.g., 50-day or 200-day) to determine the overall trend of a security. For example, if the shorter-term SMA crosses above the longer-term SMA, it may indicate a bullish trend, whereas if it crosses below, it may indicate a bearish trend.

In a risk-on environment, investors are more willing to take on risk, typically favoring higher-risk assets such as stocks, commodities, and emerging market currencies. During periods of risk-on sentiment, equities tend to rise, while safe-haven assets like government bonds and gold may decline. In this scenario, traders may use technical analysis, including SMAs, to identify bullish trends and potential buying opportunities in riskier assets.

Conversely, in a risk-off environment, investors seek safety and liquidity, leading to a sell-off in higher-risk assets and a flight to safety assets such as government bonds, gold, and the Japanese yen. During risk-off sentiment, equities and other risk-sensitive assets tend to decline. Traders may use technical analysis, including SMAs, to identify bearish trends and potential selling opportunities in riskier assets.

In both risk-on and risk-off scenarios, SMAs can help traders gauge the direction and strength of trends, identify potential support and resistance levels, and make informed trading decisions based on prevailing market sentiment.

An Exponential Moving Average (EMA) is a type of moving average that gives more weight to recent prices, making it more responsive to recent price changes compared to the Simple Moving Average (SMA). In technical analysis, EMAs are widely used indicators for analyzing trends, identifying potential entry and exit points, and assessing market sentiment.

In a risk-on environment, where investors are more willing to take on risk, EMAs can help traders identify potential entry points for buying assets such as stocks, commodities, and risk-sensitive currencies. The responsiveness of EMAs to recent price movements can help traders capture short-term trends and momentum in riskier assets.

In a risk-off environment, where investors seek safety and liquidity, EMAs can help traders identify potential exit points for selling riskier assets and moving to safe-haven assets such as government bonds, gold, and the Japanese yen. Traders may use EMAs to gauge the strength of downtrends and identify potential opportunities to sell before further declines occur.

In both risk-on and risk-off scenarios, EMAs provide traders with a dynamic tool for analyzing trends, identifying potential reversals, and making informed trading decisions based on prevailing market sentiment.

Moving Average Convergence Divergence (MACD) is a popular momentum oscillator and technical indicator used in financial analysis, particularly in technical analysis. It helps traders and investors identify changes in the strength, direction, and duration of a trend in a security's price movements. MACD is calculated using exponential moving averages (EMAs) of different time periods and their convergence or divergence.

During risk-on periods, when investors are more willing to take on risk, MACD can help identify strong upward momentum in asset prices. Traders may look for bullish MACD crossovers (MACD line crossing above the signal line) as confirmation of upward momentum in riskier assets such as stocks and commodities.

Conversely, during risk-off periods, when investors seek safe-haven assets, MACD can help identify strong downward momentum in asset prices. Traders may look for bearish MACD crossovers (MACD line crossing below the signal line) as confirmation of downward momentum in riskier assets, prompting them to consider selling or shorting positions.

In summary, MACD is a versatile technical indicator that helps traders identify trends, momentum shifts, and potential reversals in asset prices. Its application in risk-on/risk-off scenarios involve using it to confirm prevailing market sentiment and make informed trading decisions based on changes in momentum and trend direction.

The Relative Strength Index (RSI) is a widely used momentum oscillator and technical indicator in financial analysis, particularly in technical analysis. It measures the speed and change of price movements of a security to identify overbought or oversold conditions. RSI is calculated based on the ratio of average gains to average losses over a specified period, typically 14 days, although shorter or longer periods can be used based on the trader's preference.

During risk-on periods, when investors are more willing to take on risk, RSI can help identify overbought conditions in asset prices. Traders may look for RSI values above 70 as an indication that the security may be overbought and due for a correction.

Conversely, during risk-off periods, when investors seek safe-haven assets, RSI can help identify oversold conditions in asset prices. Traders may look for RSI values below 30 as an indication that the security may be oversold and due for a bounce.

In summary, the Relative Strength Index (RSI) is a valuable technical indicator that helps traders identify overbought or oversold conditions in asset prices, as well as potential divergence between price and momentum. Its application in risk-on/risk-off scenarios involves using it to confirm prevailing market sentiment and make informed trading decisions based on potential shifts in momentum and trend direction.

The Rate of Change (ROC), also known as the Momentum indicator, is a technical analysis tool used to measure the speed at which the price of a security is changing over a specified period. It quantifies the percentage change in price over a certain number of periods, allowing traders to assess the strength and direction of price momentum.

During risk-on periods, when investors are more willing to take on risk, ROC can help identify strong upward momentum in asset prices. Traders may look for positive ROC values as confirmation of bullish momentum in riskier assets such as stocks and commodities.

Conversely, during risk-off periods, when investors seek safe-haven assets, ROC can help identify strong downward momentum in asset prices. Traders may look for negative ROC values as confirmation of bearish momentum in riskier assets, prompting them to consider selling or shorting positions.

In summary, the Rate of Change (ROC) is a useful technical indicator that measures the speed and direction of price momentum in a security. Its application in risk-on/risk-off scenarios involves using it to confirm prevailing market sentiment and make informed trading decisions based on changes in momentum and trend direction.

The Lumber-to-Gold Ratio is a financial metric used in financial analysis and, to some extent, in technical analysis to assess relative economic strength and market sentiment. It compares the price of lumber, which is often considered a leading indicator of economic activity due to its use in construction and manufacturing, to the price of gold, which is widely regarded as a safe-haven asset and store of value.

During risk-on periods, when investors are more willing to take on risk, a rising Lumber-to-Gold Ratio may suggest optimism about economic growth and increased demand for commodities. Traders may interpret this as a bullish signal for economically sensitive assets such as stocks, commodities, and currencies tied to growth.

Conversely, during risk-off periods, when investors seek safety and liquidity, a declining Lumber-to-Gold Ratio may indicate concerns about economic weakness and a flight to safety assets like gold. Traders may interpret this as a bearish signal for riskier assets and may adopt defensive strategies.

In summary, the Lumber-to-Gold Ratio serves as a relative measure of economic strength and market sentiment. Its analysis in technical analysis and risk-on/risk-off scenarios involves interpreting changes in the ratio to gauge shifts in economic activity, investor sentiment, and potential implications for asset prices across different market environments.

The S&P 500 Price-to-Earnings (P/E) ratio is a key valuation metric used by investors and analysts to assess the relative attractiveness of the stocks in the S&P 500 index. It compares the current market price of the index (or individual stocks within it) to the earnings per share (EPS) of the constituent companies.

During risk-on periods, when investors are more willing to take on risk, a high S&P 500 P/E ratio may indicate optimism about future earnings growth and economic expansion. Traders may interpret this as a bullish signal, expecting stocks to continue rising as investors bid up prices in anticipation of strong corporate profits.

Conversely, during risk-off periods, when investors seek safety and liquidity, a high S&P 500 P/E ratio may be viewed with caution, as it suggests that stocks are relatively expensive compared to their earnings potential. Traders may interpret this as a bearish signal, leading to potential selling pressure as investors rotate into safer assets or adopt defensive strategies.

In summary, the S&P 500 P/E ratio is an important valuation metric used in both fundamental and technical analysis. Its analysis in technical analysis and risk-on/risk-off scenarios involves interpreting changes in the ratio to assess market sentiment, valuation levels, and potential implications for asset prices during different market environments.

The general risks associated with Technical Analysis are similar to the general risks associated with being in the market regardless of the method of analysis. 

As was demonstrated with Black Friday in 1987 and most recently with the pandemic, the risk of a one-day drop still avails itself. Since these drops are primarily based on emotion tied to a previously unknown event, a Technical Analysis portfolio is still susceptible to a one-day drop if it were to occur.

Back testing is a process used in technical analysis (and quantitative finance more broadly) to assess the effectiveness of a trading strategy or model using historical data. It involves applying a set of trading rules or criteria to past market data to evaluate how well the strategy would have performed in real-world conditions.

The Bible is crystal clear about the future being unknown. Proverbs 27:1 (Do not boast about tomorrow, for you do not know what a day may bring forth.) and James 4:14 (Yet you do not know what your life will be like tomorrow. You are just a vapor that appears for a little while and then vanishes away.). Therefore, there is an open acknowledgement that, regardless of the sophistication of the analysis, nothing will perform exactly as it did in the past.

Similar to the risks that arise from not knowing the future, there must still be the expectation that volatility will play a part in the portfolio. Technical Analysis cannot successfully predict the future and so the inherent risks of being in the market remain.

Whipsaw risk, in the context of technical analysis, refers to a situation where a trader or investor experiences losses due to rapid and unpredictable price movements that result in false or premature trading signals. The term "whipsaw" is derived from the analogy of being whipped back and forth, akin to the erratic movement of a whip.

Volatility: Whipsaw risk is often exacerbated by market volatility. Rapid price fluctuations can trigger buy and sell signals in quick succession, causing losses in the attempt to react to changing market conditions.

False Signals: Whipsaw risk often occurs when a technical indicator or trading signal generates a buy or sell signal, prompting a trader to take a position, but the price quickly reverses direction, resulting in losses. This can happen due to short-term market fluctuations, volatility spikes, or sudden news events that invalidate the initial signal.

Choppy Markets: Whipsaw risk tends to be more prevalent in choppy or range-bound markets where prices fluctuate within a narrow range without establishing a clear trend.