Broker Check

Market Conditions Explained

Each week we publish the ‘SITREP’ on the Blog of this website and it contains a paragraph called ‘Timeframe Summary’.  This updates you on what we consider to be the condition of the overall U.S. Equity market.  We classify the condition as either Positive, Neutral, or Negative.  Here we explain what these classifications mean, and why they matter.

Positive Condition (GREEN) – Positive condition means all our timeframe indicators are scoring Positive.  Here we see the presence of broad and strong demand for stocks.  From 2001 through 2018, during positive conditions the rate of return on stocks was at its best, and the maximum drawdown (peak to trough price) was relatively low.  The market was in positive condition nearly half the time. 

Neutral Condition (YELLOW) – Neutral condition means at least one of our timeframe indicators is positive, but at least one is negative.  This indicates the market is conflicted as to supply and demand for stocks.  From 2001 to 2018, there was still an upward trend on returns during Neutral periods but nothing like in Positive condition, and there was much higher drawdown potential.  The market was in Neutral nearly half the time.

Negative Condition (RED) – Negative condition means all our timeframe indicators are negative.  Commonly known as a ‘bear market’, this period typically begins with a swift collapse in stock prices, historically 50% or more.  Then there is high volatility with wild up-and-down price swings.  This is a perilous time to own stocks.  Although they were rare during the period (just 7% of the time), bear markets can be devastating for investors.

The charts below show the contrast in the performance of the S&P 500 Index from 2001 through 2018 during the three market conditions. 

Source: W E Sherman & Co, LLC;  CAGR = Compound Annual Growth Rate;  Maximum Drawdown = peak to trough decrease in price. 


The chart below shows how knowing the underlying market condition would have been useful in the past two decades.  Note the strong uptrend in Positive/Green conditions, choppy unpredictability during Neutral/Yellow conditions, and sharp devastating declines in Negative/Red conditions.