How the market regime signal works
A daily signal that determines whether to hold cash, the S&P 500, or 2× Nasdaq-100 exposure based on price trend, credit spreads, and Nasdaq relative strength.
Three independent signals determine the level of market exposure. Two can force the portfolio into cash, while the third determines whether to hold the S&P 500 or 2× Nasdaq-100.
- CASH if either the SPX band or HY OAS leg is risk-off
- HEDGE (1× SPY) if both crash legs are risk-on but NDX/SPX is risk-off
- LEVERAGED (2× QQQ) if all three legs are risk-on
Each signal addresses a different source of risk. Price trend identifies broad market weakness. Credit spreads can detect funding stress before it appears in prices. The NDX/SPX ratio identifies Nasdaq-specific weakness while the broader market remains strong.
Backtest results: 2006 to 2026
From 2006 to 2026, the signal delivered roughly the same return as buying and holding 2× Nasdaq-100, but with a 40% maximum drawdown versus 83% for buy-and-hold.
The strategy averages about two position changes per year and spends roughly one-third of the time in cash.
The three signals
S&P 500 200-day moving average band
The percentage distance between the S&P 500 close and its 200-day simple moving average, including today. A reading below −3% turns the band risk-off. A reading above +4% turns it risk-on. Between these thresholds, the previous state is maintained.
High yield credit spread z-score
ICE BofA US High Yield OAS expressed as a z-score over a trailing 252-observation window. Five consecutive days above 1.5 turn the credit leg risk-off. A reading below 1.0 returns it to risk-on.
OAS data often arrives one day late, so the signal uses the latest available observation on or before the close date. If OAS is more than 10 weekdays stale, the credit leg is disabled and treated as risk-on.
Nasdaq-100 vs S&P 500 ratio
The drawdown of the Nasdaq-100 / S&P 500 ratio from its 121-observation high. Two consecutive days below −8% turn the flag risk-off. Four consecutive days at or above −8% return it to risk-on.