Taken together, this year’s price messages seem to be acknowledging elevated risk while also anticipating a market-friendly central bank “downshift” (slower pace of rate hikes) and eventually a “pivot” (rate cuts) as inflation recedes.

seatbelt-style risk management offers consistent but relatively limited downside protection at substantial cost, while the airbag approach emphasizes cheaper “tail risk” defense over protection from moderate declines. While the seatbelt style often has an advantage during more measured declines like 2022, the airbag approach tends to compensate during rare but impactful crisis events such as March of 2020.

TCM portfolios apply a consistent process to capture an inconsistent benefit- the VIX “skew”, or its historical tendency to produce positive outlier events. Like so many times this year, TCM portfolios have begun the first stage of this process, deploying an initial tranche of protection as a turn in markets begins to invert VIX futures pricing. Should the inversion deepen, hedges are increased until the VIX enters crisis territory where its positive outlier events live. With VIX exposure at maximum 30%, these events can then produce a massive hedging benefit.

Despite historically long odds, a “soft landing” scenario seems to have been the hedging market’s base case all year, resulting in VIX complacency that has precluded any hedging benefit thus far. July’s rally was a welcome reprieve that began to normalize the VIX / S&P relationship from the S&P side and now begs an important question: is the Fed really about to pull off a miracle, or is this just the eye of the storm?

simultaneous declines of this year’s magnitude in both VIX futures and the S&P 500 were last recorded in August 2011 and September 2008, on the eve of two market crisis periods that caused the VIX / S&P “pendulum” to swing firmly in the opposite direction, from negative to strongly positive VIX hedging potential in a short period of time.