Just The Markets

Game · Economics · Intermediate

Risk-On, Risk-Off or Sit Tight? A Market Regime Game

In this market regime game each round is a hypothetical market with a mix of evidence. You decide whether to reduce risk, rotate sectors or stay with the plan, and the score goes to the reasoning.

AI-assisted, reviewed by the Just The Markets human editor: John Todora → Scored on reasoning Published

What it trains

Whether your risk decisions follow a written plan and the evidence in front of you, and whether you can resist chasing the last move.

A market regime is a label you can apply with confidence only after it ends. Inside one, you get pieces: a trend, a credit spread, a line of estimate revisions, a breadth reading, a rate decision, and a headline that makes all of them sound worse than they are, arriving in the same week and pointing in different directions, so that the only thing standing between you and a decision made on nerves is whatever you wrote down before the week began. Each round hands you those pieces for a made-up market. You decide what to do.

The plan you play with

Every round uses one written plan. Hold 70% stocks and 30% short-term bonds and cash. Watch for the warning signs: the index below its 200-day average, credit spreads widening for a month, earnings estimates falling. When any two show at once, cut stocks to 50%. Go back to 70% once fewer than two have shown for a full month. Rotate between sectors only after relative strength has shifted for a month.

Your own plan may use other signs. The discipline carries over.

How the scoring works

Each option earns 0, 1 or 2 points for its reasoning. Following the plan and the evidence scores 2. A defensible call that bends the plan scores 1. Chasing the last move scores 0, whichever way the move went. You never learn what the market did next, because a decision is sound or unsound at the moment you make it, with the evidence you had, and a good result after a bad decision teaches the wrong lesson.

What a cut buys

Here is the sum behind the plan.

The cut saves $4,000. If stocks rise instead, it gives up a similar share of the gain, which is the trade you accept when you write the plan, knowing that you will never find out in advance which of the two outcomes you are buying and that the plan’s value lies in making the choice once, calmly.

Read after playing

Start with the market regime entry. It covers the definition and the evidence behind it. Then read why you should stop trying to name the market cycle stage. The course Boom, Bust, Repeat covers the business cycle. Its lesson on credit spreads and sector returns explains why spreads earn a place on the list.

Score

0 / 12

Decisions made

0 / 6

  1. Round 1 of 6

    A loud down day in a calm trend

    The index sits 8% above its 200-day average and the average is rising. Credit spreads have been flat for two months, and analysts keep nudging earnings estimates up. Then one session drops 3% after a sharp comment from a central bank official, and every screen turns red. You hold 70% stocks, as the plan says. Warning signs showing: none.

    What do you do with the portfolio?
    How each option scores
    • A, Weak reasoning (0 of 2). This chases the last move. A single down day appears nowhere in the plan's list of warnings, and selling after a 3% drop locks in the drop while trend, credit and estimates still point the right way.
    • B, Best reasoning (2 of 2). The plan names the evidence that would justify a cut, and none of it has appeared. A 3% session sits inside the normal range for stocks. Logging it lets you check later whether the day started anything.
    • C, Defensible (1 of 2). Defensive sectors can hold up on days like this, so the idea has some logic. The plan only rotates after a month of changed relative strength, and one day gives you far too little to go on.
    • D, Weak reasoning (0 of 2). Buying the dip with the money set aside for safety breaks the 70/30 split in the other direction. The plan has no rule for adding on down days, and going above 70% raises the loss if the drop keeps going.

  2. Round 2 of 6

    Two warnings and one good number

    For five weeks the index has closed below its 200-day average. Credit spreads, the extra yield investors want on corporate bonds over Treasuries, have widened every week for a month. Earnings estimates are still edging higher. You hold 70% stocks. Two of the plan's warning signs are now on.

    What do you do with the portfolio?
    How each option scores
    • A, Defensible (1 of 2). Rising estimates are real evidence, and holding on them is a reasoned call. The plan was written for exactly this moment, though. Its trigger is two signs, two are present, and overriding it on the one good number is how a plan stops meaning anything.
    • B, Weak reasoning (0 of 2). The plan's cut stops at 50%. Going to cash is a bet that the decline will be large and that you will know when to buy back, and the plan exists because nobody knows either of those in advance.
    • C, Best reasoning (2 of 2). Two signs showing is the plan's trigger. On a $100,000 portfolio, going from 70% to 50% sells $20,000 of stock. If the trend recovers, the re-entry rule brings you back; if it keeps falling, you carry less of the loss.
    • D, Weak reasoning (0 of 2). Last week's winner is the last move. One week of outperformance tells you nothing about the warning signs, and it keeps stocks at 70% while the plan calls for less.

  3. Round 3 of 6

    New highs on fewer shoulders

    The index prints a new high. Underneath, fewer stocks are joining in: the share of index members above their own 50-day averages has slipped for three weeks. The 200-day trend is up, credit spreads are steady and estimates are climbing. Market headlines call the rally narrow. Warning signs from your plan: none.

    How do you respond to the thinning breadth?
    How each option scores
    • A, Best reasoning (2 of 2). Thin breadth deserves watching, and rallies often narrow before they fade. It is still outside the plan's list, and nothing on that list is showing. Keep the 70/30 split, track breadth weekly and think about writing it into the plan at your next review.
    • B, Defensible (1 of 2). Narrow breadth is a fair worry, so this reasoning points at real evidence. The plan does not count it, though, and cutting on a sign outside the plan makes the whole plan optional. If breadth matters to you, write it in first.
    • C, Weak reasoning (0 of 2). This chases the leaders after they have already run, and it piles the portfolio into the few stocks carrying the index. No rule in the plan calls for it.
    • D, Weak reasoning (0 of 2). Betting that laggards will catch up is a forecast with no rule behind it. The plan rotates on a month of relative strength, and these stocks are showing the opposite.

  4. Round 4 of 6

    Leadership changes hands

    For a full month, industrial stocks have beaten the index by a wide margin, and their relative strength line keeps making higher highs. Technology stocks, the largest sector weight in the portfolio, have lagged the index over the same month. Trend, credit spreads and estimates show no warnings. The plan allows a sector rotation once relative strength has shifted for a full month.

    What do you do with the portfolio?
    How each option scores
    • A, Weak reasoning (0 of 2). A lagging sector is none of the plan's warning signs. Trend, credit and estimates look fine, so cutting total risk answers a question nobody asked.
    • B, Weak reasoning (0 of 2). A week's move is mostly noise. The rotation rule uses a month of relative strength because shorter swings reverse too often to act on.
    • C, Defensible (1 of 2). Holding is sensible when the evidence is unclear. Here the plan's rotation test has been met, so standing still ignores a rule you wrote for this very case.
    • D, Best reasoning (2 of 2). A full month of changed relative strength meets the rotation rule. Shifting weight inside the stock sleeve follows the evidence and leaves total risk at 70%. Write down what would reverse it, such as a month of industrials trailing the index.

  5. Round 5 of 6

    The all-clear arrives late

    You cut to 50% stocks two months ago when two warning signs appeared. Since then the index has spent a full month back above its 200-day average, credit spreads have narrowed for five weeks and estimates are flat. No warning sign has shown for a month. Stocks are already 9% off their low, and it feels as if you missed the move.

    What do you do with the portfolio?
    How each option scores
    • A, Weak reasoning (0 of 2). Waiting for a better price is a forecast the plan never asks for. The re-entry test has been met, and holding off because stocks already rose lets the last move decide, only in reverse.
    • B, Best reasoning (2 of 2). The rule says to return to 70% after a full month with fewer than two signs, and that is where things stand. The 9% you missed is what the cut cost, and it bought protection during the weeks when the signals were bad.
    • C, Weak reasoning (0 of 2). Chasing a missed gain with extra risk takes the portfolio past the plan's maximum. If the rally fails, the loss is bigger than the plan ever allowed.
    • D, Defensible (1 of 2). Stepping back in by stages is a reasoned middle path, and some plans work that way. This one names a single re-entry level, so going halfway leaves you holding a portfolio that follows no written rule.

  6. Round 6 of 6

    Every light on

    You already hold 50% stocks after an earlier cut. Now the third sign appears: analysts are lowering earnings estimates, on top of a falling trend and widening credit spreads. Stocks are 18% below their high and the headlines are grim. The plan treats 50% stocks as its most defensive setting.

    What do you do with the portfolio?
    How each option scores
    • A, Weak reasoning (0 of 2). This chases the decline. The plan set 50% as its floor while you were calm, precisely so that a grim week would not make the call for you.
    • B, Defensible (1 of 2). Defensive sectors often hold up better when estimates fall, so there is reasoning here. The plan still wants a month of relative strength before any rotation. Check whether that test has been met before you act.
    • C, Best reasoning (2 of 2). Every sign showing is the case the plan was built for, and it already has you at its most defensive level. Staying there accepts some further loss in exchange for never having to guess the bottom.
    • D, Weak reasoning (0 of 2). Cheaper prices are the last move read the other way. With every warning sign lit, adding risk runs against all the evidence the plan relies on.

People also ask

What does risk-on and risk-off mean in the stock market?

Risk-on describes a stretch when investors favor stocks, smaller companies and lower-rated bonds because they expect growth. Risk-off is the reverse, when money moves toward cash, short-term government bonds and defensive sectors. The labels describe behavior after the fact, so they work better as a summary of evidence than as a forecast.

How do you know when to reduce risk in a portfolio?

Decide in advance which evidence would make you cut, how far you would cut, and what would bring you back. A written rule, such as trimming stocks when two of trend, credit spreads and earnings estimates turn bad together, keeps a single frightening day from making the decision for you.

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