Using Risk-On/Risk-Off Dashboards

What Risk-On and Risk-Off Really Mean

Financial markets constantly shift between two broad behavioral states: risk-on and risk-off. In risk-on environments, investors favor assets with higher expected returns and greater volatility, including equities, high-yield bonds, emerging market debt, and commodities. In risk-off environments, capital flows toward perceived safe havens such as US Treasuries, gold, the US dollar, and high-quality sovereign debt.

These regime shifts are not binary switches but rather gradual transitions that can persist for weeks, months, or even years. The 2009-2020 period was predominantly risk-on, punctuated by brief risk-off episodes like the 2011 European debt crisis and the 2015-2016 growth scare. The COVID crash of March 2020 represented an extreme risk-off event, with the VIX spiking to 82.69 on March 16, 2020, the highest closing level in history.

Understanding which regime currently prevails helps investors calibrate expectations and make more informed allocation decisions. A risk-on/risk-off dashboard aggregates multiple indicators into a single framework for regime identification.

Key Indicators for Regime Identification

The VIX: Equity Market Fear Gauge

The CBOE Volatility Index (VIX) measures 30-day implied volatility on S&P 500 options. It reflects the market's expectation of near-term price swings and serves as a real-time sentiment indicator.

Key VIX thresholds for regime classification:

During the 2017-2018 period, the VIX averaged just 11.1, signaling extreme risk-on conditions. By contrast, the VIX averaged 25.5 in 2020 and spiked above 80 during the March selloff, clearly marking risk-off territory.

Credit Spreads: The Bond Market's Vote

Credit spreads measure the yield premium investors demand for holding corporate bonds over comparable Treasury securities. Widening spreads indicate growing concern about default risk and economic deterioration.

The two most watched credit spread indicators:

Investment Grade (IG) Spreads: The ICE BofA US Corporate Index option-adjusted spread (OAS) captures investment-grade credit conditions. Normal levels range from 80 to 120 basis points. Spreads above 150 bps signal stress, while levels exceeding 200 bps indicate significant risk-off conditions. During March 2020, IG spreads blew out to 373 bps before Federal Reserve intervention.

High Yield (HY) Spreads: The ICE BofA US High Yield Index OAS tracks junk bond conditions. Normal levels range from 300 to 450 bps. Spreads above 500 bps signal caution, while levels exceeding 700 bps indicate severe stress. HY spreads reached 1,100 bps during the 2008 financial crisis and 1,087 bps in March 2020.

Credit spreads often lead equity market stress by days or weeks, making them valuable early warning indicators.

The US Dollar: Global Risk Barometer

The US dollar exhibits a pronounced tendency to strengthen during risk-off episodes. As the world's reserve currency, the dollar benefits from safe-haven flows when global uncertainty rises. The DXY index, which measures the dollar against a basket of six major currencies (euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc), serves as the standard benchmark.

Key DXY observations for regime identification:

• Sharp DXY rallies during equity selloffs confirm risk-off sentiment
• DXY weakness during equity advances confirms risk-on conditions
• Divergence between DXY and equity direction may signal regime transition

During the March 2020 crisis, the DXY surged from 95 to 103 in just two weeks as investors scrambled for dollar liquidity. This 8% move was extreme by historical standards and confirmed the severity of the risk-off episode.

Treasury Yields: Flight to Quality

US Treasury yields, particularly on 10-year notes, decline during risk-off episodes as investors bid up prices on safe-haven government debt. Monitoring both yield levels and rate of change provides regime context.

Key Treasury yield signals:

The 10-year Treasury yield fell from 1.92% at the start of 2020 to a record low of 0.31% in March 2020, confirming extreme risk-off conditions alongside the VIX spike and credit spread widening.

Building Your Risk-On/Risk-Off Dashboard

A practical dashboard aggregates these four primary indicators plus several supporting signals into a unified framework. The goal is to identify regime with reasonable confidence, not to time markets precisely.

Core Dashboard Components

Primary Indicators (weight: 60% of signal)

1. VIX level and 20-day moving average
2. Investment-grade credit spreads (OAS)
3. High-yield credit spreads (OAS)
4. DXY index level and 50-day moving average

Secondary Indicators (weight: 40% of signal)

1. 10-year Treasury yield direction (5-day rate of change)
2. S&P 500 relative to 200-day moving average
3. Copper-to-gold ratio (growth vs. safety preference)
4. Emerging market currency performance (risk appetite gauge)

Simple Scoring Methodology

Assign each indicator a score from -2 (strongly risk-off) to +2 (strongly risk-on):

VIX Scoring:

• Below 14: +2
• 14-18: +1
• 18-22: 0
• 22-28: -1
• Above 28: -2

IG Credit Spread Scoring:

• Below 90 bps: +2
• 90-120 bps: +1
• 120-150 bps: 0
• 150-200 bps: -1
• Above 200 bps: -2

HY Credit Spread Scoring:

• Below 350 bps: +2
• 350-450 bps: +1
• 450-550 bps: 0
• 550-700 bps: -1
• Above 700 bps: -2

DXY Scoring (relative to 50-day MA):

• More than 2% below: +2
• 1-2% below: +1
• Within 1%: 0
• 1-2% above: -1
• More than 2% above: -2

Sum the primary indicator scores (range: -8 to +8) and divide by 8 to get a normalized regime score from -1 (extreme risk-off) to +1 (extreme risk-on).

Example Dashboard Reading

Consider this snapshot from a hypothetical date:

This reading suggests mildly risk-off conditions, consistent with a cautious but not panicked market environment. Investors might reduce equity overweights modestly but would not need to shift to fully defensive positioning.

Data Sources for Your Dashboard

All dashboard components are available through free or low-cost sources:

• VIX: CBOE website, Yahoo Finance, most brokerage platforms
• Credit spreads: FRED (Federal Reserve Economic Data) provides ICE BofA indexes
• DXY: MarketWatch, TradingView, most brokerage platforms
• Treasury yields: Treasury.gov, FRED, any financial news site

Update your dashboard weekly under normal conditions, or daily during periods of elevated volatility (VIX above 20).

Allocation Implications of Regime Shifts

A risk-on/risk-off dashboard is diagnostic, not prescriptive. It helps you understand the current environment, but allocation decisions depend on your investment horizon, risk tolerance, and overall portfolio strategy.

Risk-On Regime Implications

When your dashboard signals risk-on (score above +0.25):

• Full equity allocations are generally appropriate for long-term investors
• Credit exposure (investment grade and high yield) typically performs well
• Emerging markets and small-cap stocks often outperform
• Cash drag becomes more costly as risk assets appreciate
• Treasury overweights may underperform

Risk-Off Regime Implications

When your dashboard signals risk-off (score below -0.25):

• Equity volatility likely to remain elevated
• Credit spreads may widen further before stabilizing
• Treasury and gold allocations provide portfolio ballast
• Cash becomes more valuable as a source of optionality
• Quality and low-volatility factors tend to outperform within equities

Transitional Regime Implications

When your dashboard signals neutral (score between -0.25 and +0.25):

• Regime uncertainty is elevated
• Avoid large tactical shifts in either direction
• Focus on portfolio diversification rather than directional bets
• Monitor secondary indicators for emerging trends
• Review rebalancing triggers and risk limits

Practical Implementation Guidelines

Avoid Overreacting

Regime indicators are noisy in the short term. A single day's VIX spike or credit spread widening does not constitute a regime change. Look for sustained moves across multiple indicators over several days to a week before concluding that the regime has shifted.

Maintain a Long-Term Anchor

Your strategic asset allocation should reflect your investment horizon and risk capacity, not the current regime reading. Tactical adjustments around the strategic allocation should be modest, typically ranging from 5% to 10% shifts in equity exposure rather than wholesale portfolio reconstruction.

Document Your Framework

Write down your scoring methodology, thresholds, and decision rules before you need to use them. Having predefined rules prevents emotional decision-making during market stress. Review and refine your framework annually, but avoid changing rules during periods of elevated volatility.

Combine with Valuation Context

Regime indicators work best when combined with valuation awareness. A risk-off signal when equities are cheap (Shiller CAPE below 15) has different implications than the same signal when equities are expensive (Shiller CAPE above 30). Use regime readings to calibrate the aggressiveness of rebalancing, not to override your valuation framework entirely.

Limitations and Caveats

No indicator framework can predict the future or eliminate investment risk. Risk-on/risk-off dashboards have several important limitations:

Lag: By the time multiple indicators confirm a regime shift, markets may have already moved substantially. The dashboard is better at identifying the current regime than predicting the next one.

False signals: Brief risk-off episodes occur regularly during bull markets. Not every VIX spike above 20 leads to a bear market. The 2011, 2015, and 2018 volatility episodes all resolved without recessions.

Regime persistence uncertainty: Once a regime shift is confirmed, you cannot know how long it will persist. The March 2020 risk-off episode lasted just weeks before reversing, while the 2008-2009 episode lasted over a year.

Changing relationships: The correlations between indicators can shift during unusual market conditions. During the 2022 inflation surge, Treasuries and equities fell together, breaking the traditional risk-off relationship.

Despite these limitations, a systematic approach to regime identification helps investors maintain perspective during volatile periods and avoid the purely emotional decision-making that often leads to poor outcomes.

Key Takeaways

• Risk-on and risk-off regimes describe broad market behavioral states favoring either growth assets or safe havens
• The VIX, credit spreads, US dollar, and Treasury yields are the four primary regime indicators
• A simple scoring methodology can aggregate indicators into a single regime reading
• Allocation adjustments should be modest and anchored to your long-term strategic plan
• Update your dashboard weekly under normal conditions, daily during elevated volatility
• No indicator framework eliminates uncertainty; use dashboards for context, not prediction