Traveling Through The Market Regimes Of The Global Financial Crisis with Grant

basics market regime sqn Feb 15, 2021

Grant wrote this as he is currently doing substantial research on categorizing the characteristics of all market regimes historically. We got to talking about the 2008 Global Financial Crisis, as it's the closest parallel that we have to how much it shook everything and everyone.   

We are putting together an extensive research report on that, but I asked him to put together a step by step summary of how the S&P 500 traveled from Bull Quiet, to Bear Volatile and back again. This is just a brief taste of the report we are producing.   

Details about the report are forthcoming.  

Take it away Grant....  

Grant here to provide insights on one of the most elusive market regimes... the dreaded bear volatile market. We will be going through some of the most famous bear markets in history and sharing our insights and research. (Can bring up that we will be producing a report for purchase) The first of our bear market study will be the Great Financial Crisis of 2008.  

Let’s go back to basics. We define the market regime by an indicator called SQN. As Chris has explained in the past there are 6 market regimes:  

1) Bull Quiet

2) Bull Volatile

3) Sideways Quiet

4) Sideways Volatile

5) Bear Quiet

6) Bear Volatile  

Below I have provided a chart of the SPX from 2007 to 2009 which displays an entire market cycle. The indicators on the chart are a 200DMA (for context because it’s popular), the 100 Day SQN, and the 20 Day Historical Volatility.  

I have categorized each regime on the chart and I will talk about the characteristics as we travel through the following replay of the GFC.


Now let’s walk through the chart from left to right and recognize the clear signs of each market regime, as you will see categorizing the market regime is like writing a narrative or a story.  

We start with the bull quiet regime which can be recognized by:

Bull Quiet Regime.

1) Trending above the 200 DMA

2) SQN was Blue and Green

3) 20-day historical volatility is low  

The bull quiet regime is the easiest to trade. In this environment look for any reason to buy and do not short! You have been warned. We then move into a sideways volatile regime; the price action clearly shows a change in market behavior:  

Sideways Volatile Regime (Topping Process):

1) Chopping above and below 200 DMA

2) Yellow SQN

3) 20-day Historical volatility is increasing  

A sideways volatile market is a war between the bulls and bears. This environment is great for the FVBO system! Longs and shorts are welcome. Just remember that eventually the conflict between bulls and bear will resolve itself higher or lower. As seen on the chart the sideways volatile regime was won by the bears with a clear break in support. This moved us into a clear bear volatile regime.  

Bear Volatile Regime

1) Break below prior support

2) Trading below the 200 DMA

3) Red SQN

4) 20-day historical volatility is ripped higher

5) Large Retracements  

In a bear volatile regime markets will make their biggest daily, weekly, and monthly moves to the upside and downside. Be prepared to see +/- 10% days or even more. Due to the noisey nature of these bear volatile regime a trader can trade long and short. But be warned, you will have very wide stops and need to position sizing will be tough.  

Think about reducing size. Downside VBO’s will work well too! After a bear trap the market starts to trade with tighter daily ranges and we moved into a sideways quiet regime.  

Sideways Quiet Regime:

1) Bear Trap Confirmed

2) Chopping around 200 DMA

3) Yellow SQN

4) 20-day historical volatility declining  

Notice the divergence in volatility and no conclusive price action. There won’t be many FVBO trades during this regime on the daily chart. The market will spend most on it’s time in a tight range. Dropping down to shorter timeframe might provide you the setup you are looking for.   Finally, we move back into everyone’s favorite market regime... the bull quiet:  

Bull Quiet Regime:

1) Trading above prior resistance SPX $945.82

2) Trading above 200 DMA

3) Green SQN

4) 20-day historical volatility is back to “normal” levels  

If you were paying attention you would have noticed that there is a market regime missing from this case study, the bear quiet. Bear quiet regimes are very rare. Here are the markers of a bear quiet regime so you can recognize them:  

Bear Quiet Regime

1) Trading below 200 DMA

2) Red SQN

3) Historical 20-day volatility below 20 (the expected max volatility in a bull quiet regime)  

You can argue that we did hit a bear quiet regime for a moment of time, but, remember this not about hard stop rules. It is about preparation and understanding the strategies that work with the narrative that the market is telling.  

Let’s now focus on the Bear Volatile portion of the cycle. From the moment we entered bear volatile to the low of the cycle the SPX was down -51%. The date I have marked as the beginning of the bear volatile regime was 1/15/2008. It is important to note that on 1/15/2008 the peak to trough drawdown was only -12.77%!  


Most market participants only state that we are in a bear market if we are down -20%. This is wrong. Focus on market characteristics not an arbitrary number. There were 3 major sell offs. 1) -17% lasting 59 days 2) -42% lasting 82 days 3) -30% lasting 59 days  


Notice the volatility expansion with each of the down moves. In a Bear Volatile regime volatility tends to cluster together. The entirety on the bear volatile regime was 450 days and the majority of the 51% of the decline happened in 200 Days.   The negative returns are a contagion and spread quickly.  

That’s it for now. If you have any questions, please reach out. We will be producing a comprehensive research pack on market regime characteristics. So, your insights and questions will allow us to provide the best research possible.  

Remember, look for the characteristics stated above and you will be able to recognize bear volatile regimes.  

There's no better time than right now to be taking these insights and building your own systems. We are still discounting the Systems Building Course  

And I can't think of a better time to be getting set up with a Prop Trading firm, this is who I trade with and mentor new traders. Check them out.

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