- 1Market regimes describe the current state of financial markets
- 2Five regimes: Bull, Sideways, Bear, Crisis, and Recovery
- 3Knowing the regime helps set realistic expectations
- 4We display regime information but don't change our investment approach
#What Is a Market Regime?
A market regime describes the prevailing conditions in financial markets. It's characterized by:
- 1Volatility – How much prices are fluctuating
- 2Trend – Whether prices are generally rising, falling, or flat
Different regimes create different environments for investors. Understanding where we are helps set appropriate expectations.
#The Five Regimes
Bull Market
Definition: - Low volatility (< 25% annualized) - Strong uptrend (price > 5% above 50-day moving average)
What it means: Markets are trending higher with confidence. Investor sentiment is optimistic, and risk appetite is elevated.
Characteristics: - Rising prices across most sectors - Low fear (VIX typically under 20) - Buy-the-dip mentality works - "Easy" market—most strategies profit
Sideways Market
Definition: - Low volatility (< 25% annualized) - No clear trend (price within 5% of 50-day moving average)
What it means: Markets are range-bound without strong conviction. Neither bulls nor bears are in control.
Characteristics: - Trading within a range - Sector rotation common - Stock picking matters more than market direction - Patience required
Bear Market
Definition: - Low volatility (< 25% annualized) - Downtrend (price > 5% below 50-day moving average)
What it means: Markets are declining in an orderly fashion. Pessimism is building, but panic hasn't set in.
Characteristics: - Grinding lower - Rallies get sold - Defensive sectors outperform - Cash becomes attractive
Crisis
Definition: - High volatility (> 25% annualized) - Sharp declines (price > 5% below 50-day moving average)
What it means: Markets are experiencing stress with elevated uncertainty. Fear is high, and correlations spike.
Characteristics: - Rapid price drops - VIX spikes above 30-40 - Indiscriminate selling - Traditional relationships break down - Liquidity becomes scarce
Recovery
Definition: - High volatility (> 25% annualized) - Upward momentum (price rising despite elevated volatility)
What it means: Markets are rebounding from stress, but uncertainty remains elevated. Early stages of recovery.
Characteristics: - Sharp upward moves - Still volatile - Risk-on sentiment returning - Factor relationships normalizing
#Why We Show (But Don't Trade) Regimes
We display current regime information but do not change our factor weights.
Why Show It?
- 1Context – Helps interpret relative performance
- 2Education – Understanding market conditions
- 3Expectations – Set realistic goals for the environment
Why Not Trade It?
- 1Timing is hard – By the time you confirm a regime shift, it may reverse
- 2Insufficient data – Robust regime strategies need 20+ years of data
- 3Transaction costs – Switching costs erode returns
- 4Quality works everywhere – Our primary factor performs in all regimes
Research by AQR's Cliff Asness shows that factor timing typically destroys value.
#The Bottom Line
Market regimes are useful context, not trading signals. They help you understand the environment and set realistic expectations.
Our approach: Maintain consistent factor exposure through all regimes, and let quality companies compound over time.
#Further Reading
- Asness, C. S. (2016). "The Siren Song of Factor Timing." Journal of Portfolio Management
- Ang, A. (2014). Asset Management: A Systematic Approach to Factor Investing
Last updated: February 1, 2026