Despite the Price Action of Late, "At this juncture, preserving capital is far more important than chasing uncertain gains."

Volatility measures across both the fixed income and equity spaces have had my attention -- and my somewhat intense ponderance -- over the past several weeks/months... In essence, the silence (or complacency), all macro things considered, has been deafening.

In other words, there's been this distinct calm-before-the-storm scent in the (or in my) air of late.

This morning's report from Sentiment Trader suggests that perhaps this is more than simply ghosts of markets past living rent free in my head (I've been doing markets for 41 years 😎).

Now, before you read on, allow me to be clear, I'm not suggesting that the next inevitable consequential bear market is at hand -- as I suggested on Tuesday, there's a legitimate bullish narrative to be seriously considered for the short-to-medium term... But I am suggesting that to pretend that all is well and that we're about to embark on the next multi-year expansion of US stock market valuations is not something to be betting big on right here.

Here are some key snippets from the Sentiment Trader report (I'll define terms parenthetically):

Emphasis mine...

Title:  Are Converging Signals Pointing to a "Pre-Storm" Phase?

"The CDX (credit default swaps [insurance against bond defaults]) risk signal appears bullish but is a trap.

Filtering for current market conditions (low VIX [measures implied volatility in SP500 options], weak PMI [purchasing managers sentiment survey]) reveals high mid-term correction risk.

Rate-cut hopes are battling economic reality.

This is a major risk warning; prioritize risk management over buying."

"Under current filtered conditions (VIX < 20, PMI < 50, SPX > 252d MA), historical data reveals a deceptive pattern. The market initially appears strong (73% 1-month upside probability) but becomes highly vulnerable to sharp, double-digit pullbacks in the mid-term (2-6 months), before showing a strong recovery (92% 1-year upside probability).

Although based on a limited sample size, this highlights a fragile market where weak fundamentals could override positive expectations, increasing the risk of a significant mid-term correction."

"What the Research Tell Us...

Data indicates that the current market is in a fragile balance torn between two powerful forces: on one hand, strong expectations of Fed interest rate cuts-an invisible hand supporting stock indices, suppressing VIX, and bringing short-term resilience to the market; on the other hand, the reality of trade policy harming the real economy-eroding corporate fundamentals and sounding the alarm through the credit market (CDX).

Historical data does not necessarily predict the future, but it provides a valuable risk assessment framework. When all conditions converge, historical patterns suggest that this contradiction between expectations and reality will likely be resolved through a significant market correction in the coming months. Therefore, the true value of today's signal lies not in predicting exact market levels, but in clearly revealing the significant deterioration of the current market's risk-reward ratio. At this juncture, preserving capital is far more important than chasing uncertain gains. The real opportunity may only emerge after the storm passes."