ViLiQ

Market regimes: risk-on and risk-off

Macro · lesson 2

23 minute read60 VILIQ Points

By the end
Define what a market regime is, name the dimensions VILIQ classifies on, and explain why a confidence figure without data coverage is incomplete.

  • Macro +14
  • Market knowledge +8
  • Risk +5

A regime is a period in which the relationships between assets are relatively stable. Within a regime, the same input tends to produce the same kind of response. When the regime changes, relationships that held reliably for months stop working, which is when most models built on the previous period fail.

Risk-on and risk-off are the two most commonly cited regimes, and they are a simplification. VILIQ classifies across eight: expansion, risk-on, acceleration, overheated, slowdown, risk-off, capitulation and recovery. The finer division matters because "overheated" and "risk-on" imply very different things about what happens next, and collapsing them loses that.

The seven dimensions VILIQ classifies on
DimensionReads high when
LiquidityReserves and broad money are expanding
GrowthSurvey and breadth measures are improving
InflationPrice growth is elevated against its own history
RatesPolicy and real yields are high
Credit stressHigh-yield spreads are wide
VolatilityImplied volatility is elevated
BreadthParticipation is broad rather than narrow

The runner-up matters as much as the winner. A classification of risk-on at 40 with expansion at 38 is a genuinely ambiguous reading, and presenting only the winner would misrepresent it. A reading of 70 against 8 is a clear call. VILIQ always shows the second place for this reason.

Common belief

"We are in a risk-on regime, so I should buy risk assets."

What is actually true

A regime describes conditions that have been measured, not a recommendation. It is backward and present-looking. Regimes also change, sometimes quickly, and the classification tells you nothing about how long the current one will persist. It is context for your own decision, not the decision.

Example — What a regime change looks like in practice

For six months, falling real yields have supported both gold and equities, and the relationship is stable enough to rely on. Then credit spreads begin widening while volatility rises. Equities start falling despite yields still falling — the previous relationship has stopped working. The regime is changing, and the model built on the previous six months is now the least reliable thing you own.

Glossary

Regime
A period in which relationships between assets are relatively stable and behave consistently.
Data coverage
The share of expected inputs actually available. It caps how confident any classification can be.
Credit spread
The extra yield demanded to lend to riskier borrowers. Widening spreads signal stress.
Breadth
How many constituents participate in a move. Narrow participation is a classic late-regime warning.

Check your understanding

0 of 4 answered

Pass mark 70%: at least 3 of 4 correct.

  1. 1.What is a market regime?
  2. 2.Why does VILIQ cap regime confidence by data coverage?
  3. 3.The classifier returns risk-on at 40 and expansion at 38. What is the honest interpretation?
  4. 4.Equities begin falling while real yields are still falling, and credit spreads widen. What does this suggest?

Challenge — Describe the current regime honestly

Open the VILIQ Home screen. Write down the current regime, its confidence, its data coverage and the runner-up. Then write two sentences a careful analyst would write about it — including at least one honest statement about what the classification does not tell you.

What a good answer contains

  • Records the label, confidence, coverage and runner-up as displayed
  • Interprets the separation between first and second place
  • States a genuine limitation, such as saying nothing about duration or about any individual asset

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Put it to work

Read a market with what you just learned, then practise with simulated money. No real order is ever placed.

VILIQ provides market intelligence, research and educational information. It is not financial product advice and does not take your personal circumstances into account. Consider your own situation and seek licensed advice before making financial decisions.

VILIQ provides market intelligence, research and educational information. It is not financial product advice and does not take your personal circumstances into account. Consider your own situation and seek licensed advice before making financial decisions.

VILIQ is operated by LTM Trading Pty Limited (ACN 659 211 426), Australia.