Using Metrics to Determine Bear Markets book report | Moon Run

Using Metrics to Determine Bear Markets book report

Introduction to the System

My interest in predicting market downturns began when I attended a mutual fund manager’s general stockholder meeting in 2006. The fund manager announced that he had a job waiting for anyone who could call market tops and bottoms within 6 days of the peak or trough. The fact that this high-ranking professional was at a complete loss when it came to predicting major market moves piqued my interest, to say the least.

For over the past decade, I’ve dedicated myself to researching market downturns and understanding how they can be accurately predicted. The result is a cohesive system of tradeable signals for three crucial market events: bear markets, shortable corrections, and market recoveries. This system has delivered 642.45% savings with Major Sell Signals and 38.34% savings with shortable corrections when tested all the way back to 1987, and it works in all market conditions. There aren’t many hedge funds that can claim a performance record like that.

In fact, in live results I forecast the following:

1) The 2008 crash on September 4
2) The 2011 meltdown on July 27
3) The 2015 correction on December 18
4) The 2018 events on March 27

I also won the the World Cup Championship of Stock Trading® in 2008, calling the crash and posting a 47.99% gain. In 2009 I took second place. This system has the advantages of knowing when to stay in and enjoy the ride higher; and also reducing whipsaws, which can impair a timing system. Essentially, it’s a quantitative analysis application of studying buying and selling pressure.

The system, called the Moon Run System, consists of three types of signals, each of which indicates a particular investment response. Major Sell Signals indicate that you should exit (or even short) the market; Shortable Correction Signals indicates an opportunity to hedge against short term declines, or even temporarily short the market; and a Recovery Signal indicates that recent storms have passed, and it’s time to get back into the market.

System Components: Building Blocks

The high-level signals that the system ultimately relies upon to predict bear markets, market recoveries, and shortable corrections are all derived from a set of five building blocks: lower-level metrics that are combined in different ways to create the high-level signals. These building blocks are the Short to Intermediate Market Timer; Market Strength Indicator; Rate of Decline; Normalized New Lows; and VIX.

The Short to Intermediate Market Timer
This timer delivers on average between 3 and 4 buy/sell combinations per year and useful for calling market turns. Buy and sell signals are generated when the market has passed several criteria and a change in direction of the Russell 2000 small cap index.

The Market Strength Indicator (“MSI”)
As its name implies, this is a simple metric that summarizes the overall health of the market. A reading above 3.80 indicates a bullish market, a reading below 3.80 suggests a bearish market.

Rate of Decline (“ROD”)
The Rate of Decline measures how quickly the market has declined from its most recent peak. Essentially an inverse slope (X/Y), readings above 190 suggest the market is stalling out, a quality that many bear markets possess before falling, and readings below 190 suggest that a correction is in the offering.

Normalized New Lows (“NNL”)
Normalized New Lows is the Nasdaq New Lows modified to take into account different number of issues traded during different time periods. When NNL is low, very few or no stocks in the index are plummeting to new lows. When NNL is high, lots of stocks are collapsing and breaking through their lower bounds. This is useful when confirming bear markets and shortable corrections.

The VIX is a metric used to determine the degree of volatility in the market. Low readings suggest the market is strong and higher readings suggest that the market is weakening.

System Components: Bear Market Signals

I have identified four indicators that reliably predict bear markets: the Tusnami Indicator; Fifty New Lows; Accelerating New Lows; and the Series of Tops. The Pep Indicator is a reversing indicator to tell when to reenter the market and the Shortable Correction is a way to capture a hedge when a larger than normal correction is forecast.

The Tsunami Indicator
The Tsunami indicator was the first bear market signal that I successfully identified. At a high level, it looks for when the Rate of Decline is above 190, showing a “stalling out” process, the Market Strength Indicator is below the thresholds, the NNL is above its threshold and the VIX is between 19 and 25.

Fifty New Lows
The Fifty New Lows signal indicates a market was in the process of splitting apart when it achieved its most recent peak with NNL > 50, the Market Strength Indicator falling below its thresholds and the VIX between 19 and 25.

Accelerating New Lows
This signal indicates that the market is in freefall, and it’s time to step aside. When the reading is above 80% (market plummeting) it’s time to step aside.

Series of Tops
The Series of Tops is determined when after a number of attempts by the market to reach new highs. The peak reading has NNL greater than 50 but the Market Strength Indicator is above 4.50, suggesting a splitting, but strong market not ready to plummet. When a sell signal is reached and the Market Strength Indicator readings are below the thresholds of 4.50 at the top and 3.80 at the sell signal, the market is ready to fall.

The Pep Indicator Recovery Signal
The Pep Indicator measures the strength of a trend reversal away from a negative market and toward a more supportive investing environment. The Pep Indicator is based on Russell 2000 price and Nasdaq Up and Down Volume.

Shortable Correction
For forecasting a drop from previous highs between 10% and 20%, this suggests hedging by shorting the IWM and possibly shorting against the box of large cap portfolios.

In Summary
The system of Bear Market, Shortable Correction and Reversal indicators can be found in the book, Before the Bear Strikes available on Amazon. The high-level rules are quite simple: sell (or go short) when a Bear Market signal flashes, buy back in when a Recovery signal flashes, and hedge or go short in the immediate term when a Shortable Correction Indicator fires. The system has worked well for me over the years and it gives me great peace of mind to know that I can navigate stormy market waters without sinking my hard-won investment returns.

If you’d like to learn more about this system, the portfolios I’ve built around it, or future additions and adjustments to the system’s signals and rules, feel free to sign up for the Moon Run Report, the URL of my investing website is
Bryan Johnson, Moon Run Report

Disclaimer: World Cup Championship of Stock Trading®” Is a registered Trademark of Robbins Financial Group Ltd. . The opinions expressed in the marketing material are the author's own and does not constitute endorsement, recommendation, or favoring by Robbins Trading Company, Robbins Financial Group Ltd. or their affiliates. Trading Futures, Forex and Stocks involves substantial risk of loss and is not suitable for everyone. Past Performance is Not Necessarily Indicative of Future Results.