MOTR Risk Gauge

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MOTR Risk Gauge

Strong Bull Market (‘Risk On’)

Description: Strong Bull Markets are characterized by all 3 timeframes in ‘Risk On’. The market moves higher as cyclical sectors, groups, and industries act as leadership.

Risk Profile: 100% invested and levered if tactical opportunity is presented. In Strong Bull Markets you want to be practicing long-term trend following by holding onto your winners. It is not necessary to be tactically trading in and out of the market.

Overbought: Overbought conditions should be ignored, as they are expected and are actually welcomed because they confirm the market’s underlying strength.

Oversold: Oversold is met with buying because the long-term trend is still healthy. An oversold uptrend is an excellent setup to add to your outperformers.

Bull Market Correction

Description: It is during painful Bull Market Corrections when the context of the longer-term reading becomes critical. Here the LT is still in ‘Risk On’ which tells us the trend is still healthy; however, MT and ST have dipped into the top half of ‘Mixed’. Our focus is now on buying stocks experiencing weakness inside of leadership sectors and industries.

Risk Profile: 80 -100% long, as the long-term trend appears structurally intact. That said, every bear market has started as a Bull Market Correction, so we’re staying alert and taking a more tactical approach to our long exposure, while still avoiding short positions for now.

Overbought: An overbought Bull Market Correction is important depending on the context surrounding it. Once MT and ST have left ‘Risk On’ and signal correction, the next rally that triggers overbought should be monitored to see if there has been repair to MT or ST. If they remain in ‘Mixed’, now might be time to take some profits on those tactical longs. If, instead, they venture back into ‘Risk On’, raise stops and let your positions develop further.

Oversold: If a Bull Market Correction becomes oversold you are now entering deep correction status and should be focused on whether the LT stays in ‘Risk On’. If the market can stabilize, this is an ideal time to put some cash to work by increasing exposure in winners and adding new tactical positions that have given you a chance to enter on this pullback.

Mixed Market (‘Mixed’)

Description: ‘Mixed’ Markets occur when the LT and MT timeframes are between 4 and 7 on the gauge. Most stocks are oscillating between overbought and oversold, potentially causing the ST gauge to travel between ‘Risk On’ and ‘Risk Off’ as the market fails to settle on a direction.

Risk Profile: Increased cash weighting is recommended; the market isn’t trending so long-term trend following is less attractive. Instead, reduce drawdown risk by leaning more on tactical swing trading strategies with smaller position sizes overall.

Overbought: Sell into market strength, resist the behavioral temptation to chase prices higher as the market becomes overbought into resistance while LT and MT gauges remain ‘Mixed’.

Oversold: Buy weakness into support. Resist the temptation to sell into weakness since a sustained move lower is not expected in a ‘Mixed’ market environment.

Weak Bear Market (‘Risk Off’)

Description: In similar fashion to a Strong Bull Market where all timeframes are in ‘Risk On’, here in a Weak Bear Market, all 3 timeframes are in ‘Risk Off’. It is common for defensive sectors such as consumer staples, utilities, communication services, and health care to lead in bear markets. They might not be advancing, but they are going down less than the cyclical sectors.

Risk Profile: Cash or net short. By the time the market is fully in ‘Risk Off’ you should already be defensively positioned with cash and short positions. This is a highly tactical environment that requires lots of attention, so most investors are simply better off in cash until conditions stabilize.

Overbought: Long-term context is incredibly important in overbought downtrends. While the short-term might be recovering slightly, overall structure is still broken, meaning you should take this as an opportunity to raise cash or add to short positions.

Oversold: Once the market is in a downtrend, new buys should be delayed, even if oversold, similar to how overbought in a strong uptrend should be ignored. Tactical traders who entered short positions while overbought may want to cover those positions into oversold conditions.

Bear Market Rally

Description: Bear Market Rallies can be nasty traps for investors eager to call the bottom and get long again. LT is in ‘Risk Off’ signaling the market, sector or group is still structurally broken, but MT and ST have crept into the bottom half of ‘Mixed’.

Risk Profile: Adding to shorts, mindful that every new bull market begins as a Bear Market Rally. Therefore, we remain very tactical in our positioning, looking for outperforming sectors, groups and stocks that could be setting up to lead the next cycle when the bottom does occur.

Overbought: An overbought Bear Market Rally is now a very strong bounce into major resistance that, as long as LT is still in ‘Risk Off’, we view as a great shorting opportunity.

Oversold: Just like an overbought Bull Market Correction, oversold Bear Market Rallies are very important depending on the context surrounding them. If the market, sector or group becomes oversold again without bringing the MT or ST back into ‘Risk Off’, there is a divergence there that could potentially be calling the bottom. Although, if MT and ST are dragged back into ‘Risk Off’ during oversold conditions, expect more weakness.