Market Correction or Regime Change? 5 Indicators Every Investor Should Watch Right Now
Doomsday social media posts are at it again. MASSIVE MARKET CORRECTIONS AHEAD! Look out, Chicken Little! The sky is falling.
Firstly, negative headlines draw 6x more viewership than positive headlines, so that’s just good writing.
Secondly, the stock market has produced massive returns over the past 3 years – 24%, 23%, and 16% respectively. That turned a $1M investment into the S&P 500 into $1.77M without adding a single dollar. Over $2M if you had a tech tilt. We are due for a correction.
Overdue Correction
Let’s address some of the market concerns. The market is ripe for a perfectly healthy correction, rebalancing, and consolidation period. Makes for an interesting time with what is happening with geopolitical tensions with Iran and company. Will this be more than a standard market reset?
Buy Low, Sell High
It’s disadvantageous to sell at new market all-time highs (ATH) because the market averages a new ATH every 20 trading days. They may be months or years apart, but the market generally goes up and to the right. The S&P produced 39 ATHs in 2025.
If it is unwise to sell at ATHs, where does buy low, sell high come from? Well, the idea is to ride the market uptrend, then sell when the trend is no longer your friend. This may be 5-10% (or more) off ATHs. Kind of where we are today (April 2026).
If you decide to sell at a scary 5% pullback, which statistically happens twice per year, and the market shoots up, you missed the move. The trend was still your friend.
Daily and weekly market movements are sporadic. Monthly and weekly movements are way smoother. Less fake outs. Less noise. Better for identifying if the trend is your friend.
Example:
I had an ER nurse comment on how terrible a BP of 55/30 was. This actually made me laugh out loud because this was the first BP of a cardiac arrest patient who after 20 minutes of CPR experienced return of spontaneous circulation (ROSC). I said, “I can work with 55/30.” Look at the 10,000-foot view. The trend was our friend.
Expect this from the broad stock market:
5% Pullback Twice per Year
10-20% Correction Every 1-2 Years
> 20% Correction Every 3.5 Years
The markets don’t teleport to the bottom. There is often a slow decline followed by a rug pull. Bear markets (> 20% pullback) often take almost a year to go from peak to trough. Recovery time is proportional to the pullback.
5-10% Pullback —> 3-6 Months
10-20% Pullback —> 8+ Months
>20% Pullback —> 2.5 Years
These averages vary quite drastically. The 2020 bear market hit quick and recovered in a “V-Shape” fashion. Elevator down, elevator up. The “Liberation Day” tariffs in April of 2025 brought similar “V-Shaped” price action.
In recent history, “buying the dip” has paid off for institutional and retail investors alike. We are currently 6% off ATHs. The Mag 7, especially software companies, double that. Is this a routine dip or something more?
Recession Indicators
Yes, I switched from price action to GDP, but go with me. The economy doesn't go from “healthy” to “recession” overnight. There are indicators in different areas such as jobs, manufacturing, housing, credit, and consumer confidence. The duration of inverse credit yields is one I was watching all of 2025.
These indicators often flash recession signals while the market continues to climb the “wall of worry.” This is a divergence between economic indicators and stock market returns.
I’m not your broker. I have a dashboard of indicators. Like anesthesia, each of these are pieces of a puzzle. Do not rely on 1 or 2 indicators to make decisions. As a CRNA by trade and a casual study in economics at best, this blog entry is no more than the thought of what a single puzzle piece may look like.
I have a set allocation that is purely “buy and hold.” I also funds that I actively manage as a means of donation to the institutional traders out there. My “fun money” if you will. I have limited my trading to gross moves.
Let’s run through my dashboard.
200-Day Moving Average (200MA)
Think of this as the stock market's long-term trend line. Take the closing price of the S&P 500 for the past 200 trading days and average them together.
When the market is trading above that average, it signals healthy upward momentum — investors call this "risk-on." When it falls below, it's a warning that the trend has shifted negative — "risk-off." The trend is no longer your friend.
There are many periods to track the moving average, but why 200 days specifically?
Meb Faber (2007) found that a simple 200MA timing strategy applied to the S&P 500 from 1900–2012 reduced maximum drawdowns from roughly -83% to -42%while maintaining comparable long-term returns. Less drawdown, same reward.
Multiple academic researchers found that being invested/risk-on when the S&P 500 is above its 200MA captures most bull market gains while sidestepping the full strength of drawdowns.
Because indicators are puzzle pieces, none are independently perfect -- the 200MA included. I’m overlaying the monthly close of the S&P as my trigger. The March close was about 1% below the 200MA indicating “risk-off.”
Volatility Index (VIX)
The VIX is often called the market's "fear gauge." It's calculated from options prices on the S&P and represents expected volatility over the next 30 days.
A rising VIX means investors are buying insurance against a market drop. A falling VIX means calm is returning.
Key VIX Levels:
< 15 —> Complacency
15-25 —> Normal Conditions
25-35 —> Elevated Fear or Uncertainty
> 35 —> Panic
The Journal of Financial Economics has confirmed a strong inverse relationship between VIX levels and forward equity returns. Basically, buying equities when VIX spikes above 30 have produced above-average 12-month returns. Wall street heuristics would say roughly 80% of the time this is true. There is a reason some traders use the VIX as their primary driver.
Elevated VIX also correlates with higher realized volatility, meaning there will probably be some big market swings in both directions, but eventually returns will happen.
Last week, theVIX dropped from the low 30s to the low 20s to close the week. The markets swing pretty wildly both directions based on the daily updates from the Strait of Hormuz.
Dual Momentum
Gary Antonacci wrote about this in his 2014 book Dual Momentum Investing. This is a bit of a lagging indicator weighing returns in treasuries vs equities.
Absolute momentum: Is the S&P 500 beating a "risk-free" alternative like Treasury bills over the past 12 months? If not, why take the risk?
Relative momentum: Among risky assets, which one has performed best lately?
Assets that have outperformed over the prior 6–12 months tend to continue outperforming over the next 3–12 months. This "momentum effect" has been documented across almost every asset class.
As I write this, the S&P is up roughly 29% over the past 12 months, comfortably ahead of the ~4.3% T-bill rate. We are also 1 year out from the Liberation Day related pullbacks. Regardless, the market returned far more than 4% over the trailing 12 months, so dual momentum is pointing “risk-on.”
The Sahm Rule
Created by former Federal Reserve economist Claudia Sahm, this rule is remarkably simple and remarkably accurate. Look at the current 3-month average unemployment rate and compare it to the lowest 3-month average from the prior 12 months. If the difference hits +0.50 percentage points, a recession is underway.
The 0.50% threshold was chosen because it has never been breached outside of an actual recession in the post-WWII era.
Sahm documented that this rule would have correctly identified the start of every U.S. recession since 1970 with minimal false positives on a real-time basis. I say minimal because 1959 and 1969 both had conditions triggering the threshold, but the recession was a bit delayed.
The Sahm Rule triggered in 2024, but no recession followed. They can always back date this if different economic data comes out, but as of now, not documented recession. Almost perfect. Good enough for a puzzle piece.
The Sahm reading in March was 0.43%. Friday’s banger jobs report decreased to 0.37%. This is a positive development for the job market.
High-Yield Credit Spreads
Credit spreads measure the difference in interest rates between risky bonds (corporate bonds, high-yield bonds, junk bonds) and safe U.S. Treasury bonds. When investors are confident, they don't demand a premium to hold riskier debt. These are tight spreads. When fear rises, they demand a bigger premium for holding risky assets. Wider spreads.
Credit spreads are important because the credit market blinks before the equity market. The canary in the coal mine. The bond market is larger, more institutional, and historically has led equities at major turning points.
The Federal Reserve Bank of San Francisco has shown that high-yield spreads above 5-6% have historically preceded recessions with strong predictive reliability. Spreads widening by more than 2-3 percentage points over a short window are associated with meaningful equity drawdowns 70-80% of the time.
The long-run average for the high-yield option-adjusted spread (OAS) is about 4.9%.
As I write this, spreads are 3.17%. Elevated from January 2026 (2.6%). Down from last week (3.46%). Trending up, but not above the 5-6% threshold.
TFC Recommendations:
For retail investors, buy and hold is a great strategy. It keeps emotion out of investing. Active management requires you to be correct twice – When to sell and when to buy back in.
I recently moved a chunk of equities into bonds. There are many considerations to approach going risk-off. Which accounts to use? What to sell? How much to sell? What to do with the capital? Maybe a topic for another day.
The 200MA is my leading indicator giving me a risk-off signal. I’m seeing other indicators creeping up, but many have improved over the past week.
Politics aside, the Trump administration is tough to get a read on. Friend one day, foe the next. Tariffs one day, gone the next.
Geopolitical conflict and $100+ crude generally don’t sit well for the market. Resolved in days or weeks, no problem. Full speed ahead.
Indicators flashing and stagflation setting in – Buckle up kids, it’s going to be a ride.
We may be at a turning point for the market. Because I’m working and have solid cashflow, I don’t care which way the market goes. I’d just like to keep a pulse on the indicators to give my best guess as to whether this will be a nothingburger, a 10% consolidation correction, or a 30% bear market gut punch.
The fed has been quicker to step in each of the last market pullbacks, but stagflationary conditions limit this ability. Interesting times ahead. Thanks for reading.
