Hi! I've been tracking market stability using a model I built that looks at volatility structure, options flow, credit stress and breadth rather than price. It classifies the market into three regimes:
* **GREEN** = stable
* **ORANGE** = fragile
* **RED** = high risk
Today my system shows GREEN (stable). This doesn't mean that stocks go up, just that internally the market is not showing any stress patterns that historically precede sharp drawdowns.
I'm posting this mostly for transparency and to see if others here track regime based risk rather than price direction. Also to further learn.
I also wanted to share two recent signals that highlight the strengths and weaknesses of this approach compared to pure price action.The "hidden" signal (nov 19) On wednesday, nov 19 the s&p500 looked fine. But my system flagged RED (high risk) specifically on financials and Small Caps.
* The logic: Credit stress and volatility dispersion were rising, even though price hadn't broken yet.
* The outcome: The very next day (nov 20), the market dropped sharply (QQQ -2.4%, SPY -1.5%).
* The lesson: Regime modeling can catch "stealth" deterioration that price action misses.
The "Late" Signal (nov 21) By friday close (nov 21), VIX had spiked to 26+. The model stayed RED through the weekend.
* The outcome: Monday (nov 24) saw a massive "V-Shape" rally (+1.5%), but the model didn't flip back to GREEN until Tuesday.
* The miss: A pure price trader would have bought the dip Monday morning. My model stayed sidelined because absolute volatility was still historically dangerous, even though momentum had shifted.
Should I tune for safety vs speed?
This highlights the tradeoff: safety vs speed. Because I engineered the system to avoid "Dead cat bounces" (buying early drops that keep crashing), it needs a significant "all clear" signal (volatility crushing) before re entering.
* It missed the first \~1.5% of the rebound.
* But it avoided the risk of catching a falling knife if monday had been a fake out.
Question for the people of stocks..
For those of you who build your own risk models, do you prioritize momentum (catching the v shape turn fast) or absolute levels (waiting for VIX/Credit to fully reset)?
I'm currently testing a way to weight "volatility momentum" higher to catch these turns faster, but I worry it introduces too much noise.
Curious to hear your thoughts..