The Sunday Setup

Happy weekend, everyone!

I wanted to start by giving a brief overview of my approach to markets and a summary analysis of how I view the major asset classes. My hope is that no matter your approach to investing, whether you’re deep value, a macro discretionary guy, or a classical chartist, etc… That I can show you how my systematic approach to investing and the unique way I analyze markets can help you make better decisions within your particular framework.

Our broader aim as a team at MO is to effectively combine my quantitative approach with Alex’s macro and Brandon’s fundamental value, giving members a more complete holistic view of the market and thus an analytical edge over those viewing things from a single narrow lens.

Understanding the current market regime and the opportunities it presents is the foundation for all of my trading. Market regimes allow us to compare current market conditions to previous ones, drawing parallels between similar market types and adapting our strategies accordingly.

Instead of relying on simplistic definitions like “a bear market is a 20% decline from the highs,” I use the SQN (Systems Quality Number) tool to organize market regimes. The SQN measures the past 100 trading days’ close-to-close, providing a frame of reference for market analysis.

Market regimes are categorized by direction and volatility:

• • Direction: Bull, Bear, Neutral

• • Volatility: High, Low

This results in six different market regimes:

• • Bull Volatile: High volatility daily ranges, potential market tops (>10% corrections possible)

• • Bull Quiet: Low volatility daily ranges, sustained trends, close-to-open gains account for most moves

• • Neutral Volatile: Large daily ranges preceding a directional move

• • Neutral Quiet: Sideways movement with low volatility

• • Bear Quiet: Trending lower, faster moves than bull quiet, highly reactive to news

• • Bear Volatile: Major market bottoms, government intervention, major headlines (rare)

Understanding these regimes is crucial because they offer insights that day-to-day trading might miss. For instance:

1. 1. Certain asset classes dominate in Neutral regimes but underperform in Bullish or Bearish regimes.

1. 1. Some asset classes spend over 80% of their time in Bull regimes.

1. 1. Popular indices that traders love to short might only spend 20% of their entire life in a Bear regime.

1. 1. Remarkably, only 0.30% of all trading days in the last 20 years were spent in Bear Volatile regimes.

Key observations based on asset classes:

• • Equities spend the most time in Bull Mode

• • Commodities spend the most time in Neutral Mode

• • Currencies spend the most time in Bear Mode

We use market regimes to aid in position sizing (higher volatility = lower risk) and to select appropriate trading strategies. For example, a Bull Quiet regime would employ a trending swing trading system like the Swing Beast Momentum System.

Remember, market regimes are helpful guides but are lagging indicators. They’re like a calendar: if you know the time of year, you can generally predict the weather, but always be prepared for unexpected changes.

Current Market Regimes:

• • S&P 500: Bull Quiet

• • NASDAQ: Neutral

• • Russell 2000: Bull Quiet

• • Gold: Bull Quiet (after reaching Bull Volatile at the end of October and correcting ~10%)

• • 30 Year, 10 Year, 5 Year, 2 Year: Neutral (2 Year strongest currently)

• • Crude: Bear Quiet

Next, I look at the weekly SPX500 (top chart) and a 10-week Simple Moving Average on the NYSE Advancing Issues (bottom oscillator).

When the bottom oscillator drops into the grey zone, I know I want to be looking for opportunities to buy the dip.  

When it falls below the grey zone, I know the market is setting up for a major bottom and I want to be looking for things to buy.

Conversely, when the S&P500 experiences just a little volatility, but this oscillator hasn’t yet fallen into the grey zone, and its market regime is still in a Blended Bull or Bull Quiet (like it is now), it means that the trend is on and the dip should be bought.

Now, let’s look at the SQN Market Regime indicator for the S&P500 below.

Notice how the slope is declining.

This means that volatility is decreasing, which means that the trend is becoming more robust (see how volatility spikes in Bull Volatile regimes [blue histogram] and these precede large corrections?

In Bull Quiets, with decreasing volatility such as this, we want to increase our broader risk exposure.

Systems Positioning

We can then combine our regime analysis with what our systems are saying about the broader market.

Looking at how our algorithmic systems are positioned gives vital insights into how the market is likely to perform in the near future. 

For example, our long-trend systems went from a 10% long exposure to large-cap tech equities in early April to a 100% long exposure right after the April low. 

In June, the Momentum systems (Swing Beast Momentum System) also kicked in and went 100% long large-cap tech equities.

When our momentum system fully kicks in, it is a warning that the trend is running hot and at risk of getting a bit over its skis.

But this is just a sign to be cautious. It’s a condition, not a catalyst for risk reduction in and of itself.

By the third week in July, our systems smelled trouble and thus reduced risk, reducing our long exposure from 100% back to 10%.

If you recall, we saw a large correction soon after in August, with the S&P dropping by roughly -10%. 

Following the August correction, these systems began slowly building their long exposure again.

Heading into the US Elections, they were 40% long and immediately bumped up to 80% long post election.

Nothing has changed since; the systems remain 80% long, with the concentration primarily in big tech. 

So the game is to stay long and buy weakness until my systems or the market regime tell me to do otherwise.

Crypto

Currently, the crypto system is 100% long altcoins.

It had been in cash since March/April 2024. 

 Then, in October, the Crypto Momentum System switched to long, mostly in Memes, Bitcoin, and Solana. 

Just recently we closed out our longs in Meme’s Bitcoin and rotated into Artificial Intelligence, Layer 1’s, Layer 2’s, Gaming, Decentralized Physical Infrastructure (De-Pin) and Real World Assets (RWA).

A few things likely caused this.

Last week, alt Coins gained traction after Bitcoin topped out near 100k (over 100k for the CME Futures), and the Grass token Airdrop created the first warning signs of altcoins taking over. 

Then Hyper Liquid did a really big airdrop, and that seemed to have kicked off a proper Alt Season the last two days. 

I like to measure this by the Total Market Cap of Crypto minus Bitcoin, Ethereum, Solana, USDT and USDC (TOTAL3-USDT-USDC). 

When it is above Bitcoin, that’s when things are getting good for altcoins. 

You can also watch $OTHERS, which is the total cryptos minus the top 10 by market cap. When that gets going, it is truly an alt season. 

So long tech / long crypto and buying weakness is the name of the game at the moment.

This is where we should be focusing most of our efforts.

Until next week.

Your Systematic Trader,

Chris