Investing 08: Distinguishing Bullish vs Bearish Markets: Why Market Regime Comes Before Stock Selection

Many investors begin their research by asking:

"What stock should I buy?"

I prefer to start with a different question: "What kind of market am I operating in?"

Before selecting stocks, evaluating fundamentals, or looking for entry points, I first determine whether the market is bullish, bearish, or somewhere in between.

This is the foundation of my top-down investment approach.

One lesson I learned over the years is that even the strongest companies can struggle in a weak market.

You may identify:

Yet the stock can still decline if the overall market is moving lower.

This is because individual stocks are often influenced by the broader market environment.

When liquidity is flowing into equities, many stocks rise together.

When investors become risk-averse, even strong companies can get sold alongside weaker ones.

As the saying goes: A rising tide lifts all boats, while a falling tide lowers them.

This is why I always determine the market trend first before looking for opportunities.

I consider myself a trend-following investor.

I am not trying to predict market bottoms.

I am not trying to catch falling knives.

Instead, I prefer to wait for evidence that a trend has already established itself.

My process generally follows:

This top-down approach helps ensure that I am trading in the direction of the broader market rather than fighting against it.

Many investors spend years searching for the perfect market indicator.

In my experience, consistency is far more important than perfection.

Some investors use:

The specific tool matters less than having a repeatable process.

The goal is not to predict the exact top or bottom.

The goal is to understand the current environment and adjust your exposure accordingly.

As an example, I use the S&P 500 as a reference for determining overall market direction.

Rather than focusing on short-term price movements, I compare the relationship between the 20-day EMA and the 250-day EMA.

The 20 EMA represents the shorter-term trend.

The 250 EMA represents the longer-term trend.

The distance between the two helps me classify market conditions.

When: 20 EMA > 250 EMA + 5%

This suggests that short-term momentum is significantly stronger than the long-term trend.

In this environment:

This is when I become more aggressive.

When: 20 EMA is within ±5% of the 250 EMA

This suggests that the market is neither strongly bullish nor strongly bearish.

In this environment:

This is often a period where patience becomes important.

Rather than forcing trades, I prefer to be selective and wait for higher-quality opportunities.

When: 20 EMA < 250 EMA - 5%

This suggests that short-term momentum is materially weaker than the long-term trend.

In this environment:

This is when I become more cautious and reduce overall exposure.

One of the biggest benefits of identifying market regimes is position sizing.

I may have the same stock setup in two different environments.

In a bullish market:

In a bearish market:

The stock setup may be identical.

The market environment is not.

And that difference matters.

Many investors focus entirely on stock selection.

I believe market regime comes first.

As a trend follower, I am not trying to forecast the future.

I simply want to identify whether the market is working with me or against me.

The exact indicator is not important.

What matters is having a consistent framework that allows you to classify the environment and adjust your exposure accordingly.

Because sometimes the biggest edge is not finding a better stock.

It is understanding the market you are investing in.