MarketLife Ep 20 – Market cycles and regimes

Podcast-Cover300A_Joe sent me a question on market cycles:

You wrote a post (here) that talked about market cycles. I request that you share some more information on market regimes and how it works within the framework of the market and business cycle. Ideas like regime characteristics, how it starts, shifts in character, and cycle are an important part of getting a read on a market. I would like to hear your thoughts on this subject as it is truly valuable.

  • What does regime mean?
    • Cycle
    • Cycle of what? Direction? Volatility? Relation to some measure?
    • Cycles can be something we impose on the market. How we measure matters.
    • Regime shift is the killer
    • The most important task of analysis is to quantify the most likely emerging market cycle
    • There is some evidence that regime shift is happening faster
  • Wyckoff cycle
    • Useful conceptual framework, but…
    • Cant tell where we are in the cycle.
  • Bull market / bear market / correction, pullback, etc
    • These are just labels we make up, but they might be useful
  • Trend / Trading range
    • Hard to quantify
    • Again, may be useful
  • Emotional cycle
    • Describes the roller coaster well, but (once again) hard to quantify
    • Maybe a valuable message to traders here: protect yourself from the cycle.
  • News cycle
    • Markets become sensitive and insensitive
    • This reflects sentiment and psychology that drives the other cycles?
  • Volatility cycle
    • Volatility begets volatility
    • Volatility decays more or less predictably
  • Relation to other measures
    • To moving averages, trendlines or other measures
    • Useful as a measurement. Maybe not useful as predictive tool.
  • Two forces cycle
    • Mean reversion and momentum
    • What is the fundamental question of trading? Go with or fade?
    • This answers that.

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Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.