He can recognize a similarity with Chloe's appearance, but he doesn't know definitively what the color means. But the twitch in the man's hands and the direction of his gaze-- Sephiroth has plenty of experience recognizing the threat of attack.

"You wouldn't be the first to wonder. I don't bleed easily."

That's as much of a warning as he's going to offer. He could draw attention to the machete tucked into his belt, but he doesn't. His own posture is still--maybe unnaturally so. He's used to his mere presence being intimidating enough to dissuade all but the very stupid or very determined, and he forgets that a lot of that is tied to a reputation he doesn't have here.