Market Risk ON/OFF

11. Jan. 2022

Market Risk ON/OFF is a indicator designed to show you when it may be a good time to add hedges and/or reduce long exposure to the US stock market. It can be used to make forecasts on the overall market, when a crash or bear market may be about to occur and when a bull market is still strong. When the indicator is applied to a chart, entire time periods will be shaded either Green (Risk-ON Mode) or shaded Red (Risk-OFF Mode). It can be applied to any chart, however it's best applied to a chart of the S&P 500 Index or the ETF SPY on the daily timeframe.

It's calculation is based on 3 things; price action of the S&P 500 Index ETF SPY, overall market breadth (that is advancing stocks versus declining stocks) and CBOE Volatility (VIX) Futures term structure. By default 2 out of these 3 signals must be in confluence for a regime change from Risk-On to Risk-Off mode, however this setting can be changed to either 1, 2 or 3 signals required for a regime change.

You can see in the chart above an example of how this indicator would have alerted users on the 25th February 2020 of a change to Risk-Off mode and allowed you to prepare for a possible market crash which happened (the Covid bear market) and when things settled down it switched back to Risk-On mode on the 24th of April 2020 letting you know it was safer to position your portfolio for a bull market again.

Here's another example from the 2008 Global Financial Crisis (GFC) market crash of the Market Risk ON/OFF indicator alerting you to a possible crash.



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Enjoy :)


Disclaimer: All my scripts and content are for educational purposes only. I'm not a financial advisor and do not give personal finance advice. Past performance is no guarantee of future performance. Please trade at your own risk.