What Market Cycle Are We In?
📶Decoding the S&P500: Breaking Down the S&P 500 Stocks Market Cycle | Market Cycle Chart | Alpha Hedge Performance Review
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Decoding the S&P 500 Market Cycle and sharing the backstage here in the Wall Street Insider Report.
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S&P 500 TRACKER
What Market Cycle Are We In?
(08/07/2024 Update)
The S&P 500 is currently in Phase 4 of the market cycle, known as the Public Phase.
This phase is characterized by immense public participation and heightened enthusiasm. The key indicator of Phase 4 is a peak in public interest and participation, which often signals that the market is nearing its top.
Updated Data: Breaking Down the S&P 500 Stocks Market Cycle
The Treemap displays the distribution of S&P 500 stocks by market capitalization percentages across 6 phases of the market cycle. Each phase is represented as follows:
Phase 1: Institutional (1.7%)
Phase 2: Basis (0.9%)
Phase 3: Wall Street Insider (27.4%)
Phase 4: Public (55.1%)
Phase 5: Top (2.7%)
Phase 6: Decline (12.3%)
The treemap's dominant phases, Phase 4 (Public) and Phase 3 (Belief), indicate that a substantial portion of the market capitalization is concentrated in these phases. Specifically:
Phase 4 (Public) at 55.1%: This phase is characterized by widespread public participation and heightened enthusiasm, typically signaling an advanced stage of the market cycle where prices are high, and risk of a downturn increases.
Phase 3 (Belief) at 27.4%: This phase is noted for its strong and steady uptrend with a favorable reward/risk ratio, suggesting that a significant portion of the market is still in a growth phase but with increasing caution as it transitions into Phase 4.
Phases 5 and 6, which represent the market top and decline respectively, comprise 15% of the market cap, indicating that a portion of the market is already experiencing or approaching bearish conditions.
This is crucial for anticipating potential shifts in the broader market sentiment.
INSIDERS’ KNOWLEDGE HUB
Market Cycle Chart
Hope: Phase 1
This stage is marked by fundamentally strong companies with attractive growth prospects and increasing institutional interest. As smart money accumulates positions, there's a transition from selling to buying pressure.
Investors Approach in Phase 1
Investors should detect early price shifts, focus on fundamentally strong stocks, and await confirmation of an uptrend.
Optimism: Phase 2
Prices stabilize after a significant decline, indicating a potential bottoming process.
Investors Approach in Phase 2
Investors should observe the market for signs of stability and potential recovery.
Belief: Phase 3
Characterized by a strong uptrend, this phase showcases a period of increasing buying pressure in the market. It represents the best reward-to-risk point for buying.
Investors Approach in Phase 3
Investors should buy at this phase to potentially maximize returns. This marks the start of the positive cycle.
Euphoria: Phase 4
Assets gain extensive attention from media and influencers. Retail investors, often driven by the fear of missing out, begin showing significant interest and participation in the market, contributing to rapid price appreciation.
Investors Approach in Phase 4
Investors are advised to maintain their positions constructed in Phase 3 and resist the natural urge to sell too early in the trend.
Anxiety: Phase 5
The uptrend begins to lose momentum, signaling the peak of market euphoria, which may be unsustainable. During this phase, large institutions may start exiting, securing profits.
Investors Approach in Phase 5
Investors should be cautious of market weakness and prepare for potential downturns.
Denial: Phase 6
This marks the end of the positive cycle and the beginning of the negative cycle. The market undergoes a significant reversal from the previous uptrend, indicating a transition into a bearish environment. This is the time to sell.
Investors Approach in Phase 6
Investors should focus on risk management, prioritize capital preservation, and consider hedging strategies.
Alpha Hedge Portfolio Performance Review
Sorry, Complex Models Outperform Simpler Ones
(07/08/2024 Update - Day 1025 since I turned my portfolio public.)
In a recent analysis, we explored that “Complex Models Outperform Simpler Ones" and its impact on investor decision-making.
In financial machine learning, complex models often outperform simpler ones, challenging the traditional principle of parsimony.
Modern techniques like ridge regression address this by adding penalty terms to control over-parameterization. These techniques enhance the model's ability to generalize to new data, improving prediction accuracy.
High-dimensional linear prediction models benefit significantly from these advancements, managing complexity effectively.
Investors often fall into the gambler's fallacy, believing that short-term streaks will balance out over time, or the "hot hand" bias, where they expect ongoing success based on a small sample.
These biases lead to misguided conclusions about market trends, ignoring the need for larger sample sizes for accurate predictions. By understanding the flaws in these heuristics, investors can avoid costly mistakes and make more informed decisions.
The Alpha Hedge Portfolio achieved a monthly gain of 4.2%, bringing its year-to-date increase to 25.3%. Over the past 34 months, the portfolio surged by 47.7%, significantly outpacing the S&P 500's 25.6% return during the same period.