Building a composite regime score from monetary climate and weekly trend

A single running total

A market-regime score is assembled by adding a multi-input monetary-climate total to a single weekly momentum score. The finished object is a composite-regime-score: one running total formed by adding a monetary-climate point block to a binary weekly trend score.

Three climate inputs

The monetary-climate-layer is a bounded 0-to-8 point block built from three separately scored inputs: a prime-rate-switch, a policy-and-reserve-tally of discount-rate and reserve-requirement changes, and a year-over-year installment-credit-switch.

Prime-rate rules

The prime-rate-switch awards 2 points or 0. With a peak above 8 percent, a 1 percent decline or two consecutive cuts earns 2 points. With a peak below 8 percent, a single cut earns 2 points.

The switch returns to 0 after an initial hike if the low is above 8 percent, after a 1 percent hike if the low is below 8 percent, or after two consecutive hikes. The 8 percent peak-or-trough split decides how large or repeated the move must be before credit is given or removed.

Discount-rate and reserve decay

The policy-and-reserve-tally is a time-decaying score of discount-rate and reserve-requirement changes that is later mapped into 4, 2, 1, or 0 climate points. Each rise in the discount rate or reserve requirements subtracts 1 from the tally, cancels any current positive points, and expires after six months, so a later hike can stack another minus 1 until the earlier point ages off.

The first easing after a hike clears negative points and awards two positives, one lasting six months and one lasting a year. A further easing adds only one six-month positive. The raw tally is described as running roughly from the mid-negative single digits to the mid-positive single digits.

Installment credit

The installment-credit-switch is scored from the nonseasonally adjusted year-over-year percentage change in consumer installment debt. It awards 2 points if the series is declining and under 9 percent, and 0 if it is rising and reaches 9 percent or more.

Closing the climate block

The raw policy-and-reserve-tally is converted into monetary-climate points as 4 when it is +2 or higher, 2 when it is 0 or +1, 1 when it is -1 or -2, and 0 when it is -3 or lower. After that mapping, and after the prime-rate and installment-credit switches are added, the finished monetary-climate total can run from 0 to 8.

Weekly trend confirmation

The momentum layer is only a weekly-close four-percent-weekly-trend-switch. It is a trend-following rule that awards 2 points in buy mode and 0 in sell mode. A 4 percent rise from any weekly close, not necessarily the prior week, sets buy mode. A 4 percent fall from any weekly peak sets sell mode.

On, hold, and stand aside

The combined score can run from 0 to 10. Buy mode starts at 6 or higher and remains in force until the score falls to 3 or lower. That hysteresis-band turns the buy regime on at a score of 6 or more and leaves it on until the score falls to 3 or less.

A mechanical-trading-system is a fully specified scoring procedure whose inputs, point awards, decay windows, and on/off thresholds can be tested as one set of entry, exit, and abstention rules. A dated snapshot of the construction showed an unchanged reading of +8 from October 1992 through 11 February 1994.