Why So Many Investment Strategies Fail?

“Buying the Dips” is probably one of the most profitable trading strategies during upward trending markets. However, doubling down on a falling stock – even on high quality ones – could wipe out years of gains within a few weeks. Nothing about a company might have changed, except the top-down market regime for risky assets. Basically, the same is true with every non-adaptive trading strategy.

In order to avoid such pitfalls, it is crucial to identify market regimes and switches in a timely manner. With our proprietary tools, especially with the WSC Big Picture Indicator, reviewing the relevant signals of our market indicators to identify the current regime will not take more than a few minutes.

Identifying & Classifying Market Regimes

The main purpose of our Big Picture Indicator is to identify and classify the current market regime of the S&P 500. By condensing all signals of our published market indicators, the Big Picture Indicator systematically measures the current position of the S&P 500 within a pre-defined market regime map. This map includes six market regimes, each one having its own characteristics in terms of expected risk and reward.

Such an in-depth classification is supporting members in adjusting their trading strategy to the current market regime and will help them to minimize the risk of unfavorable entry or exit points while maximizing return opportunities.

The Big Picture Indicator identifies the current market regime of the S&P 500 on a daily basis and acts, therefore, as macro weather situation for global risky assets (by condensing all signals of our published market indicators).  Each pre-defined market regime has its own characteristics in terms of risk and reward (click the “Market Regime Details” tab above for further information).

There is a significantly high probability for a stronger pullback, correction or even a bear market in a “Bearish” or in “Bearish Consolidation” market regime. Take profits, reduce leverage and high risk/beta trades, and define a hard stop-level to exit. Although prices might appear cheap, do not start bottom fishing or build up speculative long positions unless typical signs for a positive market regime switch are visible.

Buy the dips or increase leverage in “Bullish” or “Bullish Consolidation” market regimes, whereas build up only tactical exposure (in combination with close stops) in “Recovery” and “Stabilization” regimes.

Overview:

  • Category: Summary
  • Update Schedule: Daily & Weekly

Description/Construction:

  • The WSC Big Picture Indicator identifies the current position within an ongoing stock market cycle. It shows the cyclical relationship between the most important signals from our short- and mid-term oriented timing indicators (trend, market breadth and sentiment/contrarian) in a six-quadrant diagram (Path View). This Path View is then translated into a line chart (normal view).

Regimes:

  1. Bullish
    • Description: Positive market regime accompanied by low volatility. The uptrend is packed by a high trend quality since the upside participation within the stock market is broad-based. Sentiment is neutral to fearful. Risk of a sustainable trend reversal is outright low.
    • Strategy: Build up or hold long positions, increase exposure/leverage on weak trading days, sell volatility, buy high beta stocks, sell puts or buy calls.
  2. Bullish Consolidation
    • Description: Positive market regime accompanied by increased volatility. The uptrend is slowing down, or might even turn neutral, but the trend quality remains moderate to high. At the beginning of that regime, sentiment is typically greedy and at the end fearful. Although negative trading days are likely, the risk of a sustainable trend reversal remains low. Ignore these negative trading days, as they are just part of a healthy breather.
    • Strategy: Hold long positions (no usage of leverage), sell covered puts, buy calls as speculation.
  3. Bearish Consolidation
    • Description: Capped upside potential together with an increasingly high risk for waterfall declines. Expect high volatility in that regime. The trend is neutral to bearish biased and the downside participation within the index starts to increase. The trend quality starts to confirm the negative trend of the index. Sentiment is typically neutral or even still greedy. Weak trading days are often just the starting point for stronger selling pressure or even a correction.
    • Strategy: Take profits, reduce leverage and high risk/beta trades, and define a hard stop level to exit.
  4. Bearish
    • Description: Negative market regime accompanied by extremely high volatility. The trend is negative and packed by a broad basis. Thus, the trend quality is high. At the beginning of that regime, market sentiment is typically neutral and at the end fearful. The market is also hitting the ultimate low in that regime (since at the end nobody is left to push prices lower).
    • Strategy: Although prices might appear cheap, do not start bottom fishing or build up speculative long positions unless typical signs for a stabilization regime are visible.
  5. Stabilization
    • Description: Stabilizing market regime accompanied by declining volatility. The downtrend is slowing down or turned even neutral. The quality of the downtrend is low since the upside participation in the index starts to increase from low levels. Sentiment is typically neutral to fearful. In that regime it is difficult to differentiate if the stabilization/
      recovery process is sustainable or just part of a stronger bear market rally.
    • Strategy: Build up tactical/selective exposure, buy calls as speculation and use close stops in that regime.
  6. Recovery
    • Description: Increasingly positively biased market environment accompanied by high volatility. The uptrend is getting increasingly broad-based in its nature, whereas sentiment is typically fearful.
    • Strategy: Build up selective exposure, buy calls as speculation and use close stops in that regime.

The Idea Behind the Big Picture Indicator

No indicator is right all the time, and, in most cases, they even contradict each other. To avoid these shortfalls, the Big Picture Indicator only uses well-tested and well-selected indicators that are consistent and complementary to each other. Each indicator is designed to measure a typical pattern of a certain market regime and is, therefore, just representing a small fraction of the big picture. Apart from the ability to generate reliable signals, an important selection criterion is, also, to provide information based on alternative and low-correlated input data.

As a result, the underlying market indicators do not only measure the macro trend of the S&P 500, but also the trend quality (aggregated trend information of its constituents on multiple time frames) as well as market sentiment and the  investment behavior of Smart and Dumb Money. “Smart Money” is always trend-leading, whereas “Dumb Money” is trend-lagging. Thus, measuring the investment behavior of “Smart and Dumb Money” also helps to identify major shifts before typical price indicators do.

In combination, these indicators enable an unbiased view on the market by reducing the number of redundant signals based on the same information (e. g. price).

The Process Behind the Big Picture Indicator

The Big Picture Indicator identifies and classifies the current market regime of the S&P 500 by condensing all signals of our published market indicators.

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The subscriber’s section of WallStreetCourier currently updates over 50 well-selected and well-tested market indicators. Our mostly proprietary indicators measure the macro trend of the S&P 500, the trend quality as well as market sentiment & the  investment behavior of Smart and Dumb Money. This also includes the well-known Smart Money Flow Index.

Ready To Uncover The Big Picture?