Market Phase Shift
Last updated May 9 2023
The Phase Shift indicator is generated by observing correlation regimes amid stocks.
Correlation is the degree to which assets co-move.
When correlation among stocks is high (prices are moving in a similar direction), it usually forewarns of downward moves in the market as a whole: when stocks crash, they crash all together and it can be useful to identify the early-moving bellwethers.
On the other hand, little correlation among stocks is usually associated with healthy markets that trade on fundamentals. In general, this is a condition more common with upward-trending markets.
We observed when correlation among stocks is slow, the highest probability of a move up in the market could be observed within the next 10 trading days. On the other hand, when correlation is high, the maximum drawdown could be observed after the 10th trading day. In the case of low correlation, returns could start to rise again after the 10th trading day but when correlation is high, the ideal holding period is 15 trading days, nothing more.