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Here’s a sample of our Weekly Market Regime Newsletter, also serving as a blueprint for using our tools to identify profitable market regimes
This Market Regime Newsletter was issued on April 21st, 2024
Robust uptrend. Highly positive market regime accompanied by significantly low volatility. Prices consistently show an upward trend, supported by a wide range of well-performing stocks within that market. Even in the face of negative news, the market demonstrates remarkable resilience with such a high positive trend quality. Weak trading days are typically short-lived overbought, or sentiment driven reactions, leaving the market better positioned for further gains.
Our definition of market regimes is rooted in a systematic analysis and combination of multiple indicators, aimed to identifying robust trends. These trends are measured by analyzing signals from multiple indicators across various categories (trend, trend quality, and sentiment, including dumb- and smart-money positioning) and timeframes. This diversified approach enables us to maintain an unbiased and robust view of current market conditions by analyzing the most important trend factors.
This is also illustrated in the spider chart below, which breaks down the current trend status of the VanEck Gold Miners ETF (GDX) into its key components. The readings range from 0 to 100, with higher values indicating stronger positive signal strength for each component.
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As you can see, gold miners (GDX) have robust readings across all timeframes and across all relevant key components. These are typical characteristics of a strong uptrend labeled as the ‘Very High Reward’ market regime, driven by solid momentum, an expanding pool of stocks joining the movement, and increasing smart money positions.
With strong readings across the board, the current uptrend is poised to continue smoothly, with a very low risk of a sudden reversal.
To monitor the trend status of VanEck Gold Miners ETF (GDX) over time, we combine these key components according to their timeframe into Market Health Indicators. These indicators are representing composites of these key componentes for three different timeframes. Scores on a 0 to 100% scale denote signal positivity. Values below 50% indicate a negative outlook, while those above 50% signal positive market health.
The chart below illustrates the VanEck Gold Miners ETF (GDX) in the first panel, followed by three subsequent panels detailing Short-, Mid-, and Long-Term Market Health over the past year.
Throughout most of the period, gold miners struggled with Short- to Long-Term Market Health readings consistently below 50%, indicating a lack of positive indicators in trend, trend quality, and sentiment. This pattern is characteristic of a pronounced downtrend resulting in a ‘Very High Risk’ market regime. Often, these steep downtrends are punctuated by robust oversold bounces, driven by short-sellers capitalizing on profits, typically spurred by positive news flow. However, since these gains lack substantial backing from real demand, the market swiftly reverts to its initial downtrend once short-sellers resume their positions. These corrective bounces can be easily identified, as in such scenarios, only the ‘Short-Term Market Health’ metric shows signs of recovery, while the Mid- to Long-Term Market Health remains weak.
With our structured approach, we can identify the respective market regime for any market. Our methodology include the following steps: Identify Robust Trends Monitor Market Health Determine Market Regimes
How to spot high-reward & low risk market opportunities
3 Steps for Determining Market Regimes
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Things play out differently when the rally is powered by a widespread demand. In such instances, the initial counter-trend rally evolves into a more substantial uptrend. This has been evident recently as Short to Long-Term Market Health rose to quite confirmative levels. This illustrates that the current uptrend in the VanEck Gold Miners ETF (GDX) is fueled by robust demand, as evidenced by a wide range of stocks in the index trading well above their 20/50/100/150 and 200 moving averages, displaying positive MACD readings, strong uptick in volumes, an increasing number of new highs, and further positive signals among dozens of other indicators. Consequently, the risk of a sudden trend reversal should remain exceedingly low as long as we observe such strong values across the board.
This positive market environment is reflected in our Market Regimes Gauges below. By combining short- to mid-term and mid-term to long-term market health readings, the specific market regime is determined. These Market Regime gauges help identify market regimes within seconds. To be more precise, the Tactical Short-Term Market Regime is constructed upon the combination of short- to mid-term market health, while the Strategic Long-Term Market Regime is based on the amalgamation of mid- to long-term market health.
Since full market regime data became available in 2006, the VanEck Gold Miners ETF (GDX) has entered a ‘Very High Reward’ market regime 164 times from a short-term perspective and 80 times from a longer one. These regimes are marked by Short- to Long-Term Market Health readings consistently above 50%. Impressively, in 84.1% of these instances, GDX yielded positive returns. However, the picture changes slightly for the longer term. Here, GDX has a win rate of only 52%, indicating high volatility and making it primarily suitable for tactical traders. This fact becomes apparent when analyzing volatility within these regimes, which averages around 29% in the long term and 35% in the short term.
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