Market Environment Awareness: A Simple, Objective Framework for Evaluating Market Conditions

Dual Edge Research publishes two powerful newsletters that work great individually — and even better together. The Bull Strangle Newsletter focuses on stocks and options, combining stock ownership with premium-selling strategies to generate consistent income and market-beating returns. The Smart Spreads Newsletter specializes in seasonal commodity futures spreads, offering a diversified approach with low correlation to equities. Together, they deliver a complete investment perspective — one focused on income, the other on diversification — all under one simple subscription.

The Bull Strangle Newsletter, released weekly, shares a trading strategy that has achieved a documented 76%-win rate and outperformed the S&P 500 by 240% since inception. The strategy combines buying stock and simultaneously selling out-of-the-money covered calls and cash-secured puts to generate option premiums and manage risk.

Introduction

Over the past several weeks, the market has begun to look increasingly top-heavy, with several major indexes showing early signs of weakening participation beneath the surface. These internal cracks—combined with rising volatility—make this an ideal time to revisit a structured way to evaluate the overall market environment. To cut through the noise, the Market Environment Awareness framework uses three objective, data-driven components that together form a snapshot of the current market regime. This system is simple, stable, and designed to avoid subjective interpretation. It is also the model used in Chapter 19 of the Bull Strangle book. The goal is not to predict the market, but to classify its condition.

The Three Components of Market Environment Awareness

1. Trend Component: S&P 500 vs. Its 200-Day Moving Average

The 200-day moving average is one of the most widely respected long-term trend indicators. It flips infrequently and provides a reliable distinction between bullish and bearish market phases.

• SPX > 200-day MA → +1
• SPX < 200-day MA → –1

A positive score reflects a constructive long-term trend, while a negative score signals a deteriorating backdrop.

2. Volatility Component: VIX Regime Classification

Volatility sits at the center of risk appetite, liquidity, and market stability. These thresholds have been used institutionally for decades:

• VIX < 20 → +1 (calm)
• 20–30 → 0 (caution)
• VIX > 30 → –1 (high stress)

A reading below 20 typically supports equity markets. Readings above 30 indicate stressed conditions in which risk can escalate quickly.

3. Breadth Component: % of S&P 500 Stocks Above Their 50-Day MA

Breadth reveals what’s happening beneath the index surface. Historically, breadth deterioration often precedes market declines, while improvements precede recoveries.

• > 60% → +1 (strong participation)
• 40–60% → 0 (neutral)
• < 40% → –1 (weak breadth)

This measure captures whether the average stock is participating in the market trend—or being left behind.

Hybrid Score and Market Regime Classification

By summing the three components, we produce the Hybrid Score, which ranges from –3 to +3:

This system does not dictate market timing—rather, it sets appropriate expectations and exposure levels given the current environment.

Current Readings as of Friday’s Close

Using the exact scoring criteria from above:

1. Trend Component: +1

• S&P 500: 6602.99
• 200-day moving average: 6162.75
• SPX is comfortably above the long-term trend → +1

2. Volatility Component: 0

• VIX: 23.43
• Falls into the 20–30 caution zone → 0

3. Breadth Component: –1

• % of S&P 500 stocks above 50-day MA: 39.16%
• Below the 40% threshold → –1

Hybrid Score: +1 + 0 – 1 = 0

Interpretation: The Market Is in a Moderate Regime

A Hybrid Score of 0 places the market squarely in the Moderate regime.

This environment is defined by:

• A strong long-term uptrend (positive)
• Volatility rising but not stressed (neutral)
• Breadth breaking down (negative)

This combination reflects a market that looks increasingly top-heavy, with weakening internal strength—even as the headline index remains elevated.

What this means generically:

• Investors should avoid being fully invested.
• Position sizing should be reduced to ~70% of normal.
• Maintaining 35–40% cash is prudent in case conditions deteriorate further.
• Expect a wider range of outcomes and increased choppiness.

How the Bull Strangle Newsletter Uses This Information

While this framework is designed to be broad and market-agnostic, the Bull Strangle Newsletter uses the Hybrid Score as a backdrop for interpreting weekly conditions:

• It does not change the mechanical entry rules.
• It does help set expectations regarding volatility, risk, and the tone of upcoming setups.
• A moderate score—like the current 0—signals a period where discipline, sizing awareness, and watch-list quality become especially important.

This structured market-environment awareness ensures the strategy is executed with context, not in a vacuum.

More Information

Now you can get two powerful newsletters — for one simple price!

• For stocks and options, the Bull Strangle Newsletter shows you how to combine stock ownership with dual option selling — a disciplined strategy that has consistently outperformed the S&P 500.
• For commodity futures, the Smart Spreads Newsletter focuses on seasonal commodity spreads — a proven, low-correlation approach that thrives in all types of markets.

Each newsletter is designed to deliver consistent income on its own — but when used together, they create a complete, diversified trading approach that works in any market environment.

Visit BullStrangle.com to subscribe for just $1 for the first month.

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Darren Carlat

Dual Edge Research

(214) 636-3133

DualEdgeResearch@gamil.com

www.BullStrangle.com

Disclaimer

This information is for informational purposes only and should not be considered as investment advice. Past performance is not indicative of future results, and all investments carry inherent risk. Consult with a financial advisor before making any investment decisions.