The basket is deliberately small and deliberate. Four pairs, each representing a structural axis of capital allocation: SPY/QQQ (risk appetite, with QQQ isolating the AI speculation premium), TLT/UUP (duration and dollar — the rate regime), GLD/BTC-USD (de-dollarization channels — physical vs. digital), and VEU/EEM (global rotation — developed vs. emerging). Eight instruments, four axes, one coherent picture.
We don't include sector ETFs or individual stocks. The Temperature model is upstream of stock selection — it tells you what kind of market you're operating in before you choose what to buy.
Each instrument is scored across five dimensions that together capture whether a move has structural support or is running on fumes:
Position (30 points) measures where price sits in the moving average stack — above all three (20d, 50d, 200d) is structurally hot; below all three is cold. The Z-score vs. the 200-day SMA adds a mean-reversion overlay.
Momentum (25 points) captures velocity (5-day rate of change), acceleration (5d ROC vs. 20d ROC), and RSI divergence. A fast move that's accelerating with confirming RSI scores differently from one that's decelerating with bearish divergence.
Volume (20 points) answers whether the move has participation. OBV trend, volume-to-average ratio, and net conviction all contribute. A price move on declining volume is suspect.
Volatility (15 points) measures range expansion — ATR change, Bollinger width, recent day ranges relative to the 20-day average. Expanding volatility in the direction of the trend adds conviction.
Fragility (10 points) is the inverse signal: volume dryness, Bollinger squeeze, and gap probability. Low fragility means the instrument is well-supported. High fragility means the current state is unstable — a coiled spring.
The individual temperature scores are interesting. The regime label is where it gets useful. By comparing temperature differentials across the four pairs, the model classifies the current market into one of eight regimes — from Risk-On Expansion (equities hot, havens cold, dollar weak) to Systemic Deleveraging (everything cold except the dollar).
Each regime has historical precedent and carries practical implications for portfolio construction, sector rotation, and risk sizing.
Are we in a risk-on or risk-off environment? The basket temperature and regime label answer this directly.
Is the move confirmed or fragile? High temperature with low fragility scores means the move has legs. High temperature with high fragility means it's extended and vulnerable.
Where is the rotation happening? When GLD is hot and SPY is cold, capital is moving to havens. When VEU heats up while SPY cools, non-US rotation is underway. The cross-read is the signal.
How correlated is everything? The absorption ratio measures whether instruments are moving independently (healthy) or in lockstep (fragile). Above 70%, one factor dominates — and single-factor markets break hard when that factor reverses.
Money Temperature feeds directly into the Weekly Signal framework at the Regime (L1) and Health (L3) levels. It also informs position sizing: when fragility is elevated and absorption ratio is high, we reduce gross exposure regardless of directional conviction.
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