What do Risk On and Risk Off mean?
Risk On means the conditions a strategy requires for holding equities are being met, so it holds them. Risk Off means they are not, so it holds something defensive instead: treasuries, short-duration bonds, or cash equivalents depending on the strategy.
The terms describe a state the rules produce, not a forecast anyone is making. A strategy is Risk Off because a measurable condition failed, not because a decline is expected.
The site-wide Risk On / Risk Off indicator
The indicator shown on the site is a single, simple comparison:
Risk Off when the weighted momentum of US large-cap equities is at or below the weighted momentum of cash. Risk On otherwise.
In plain terms: if broad US equities have not been outperforming cash on a blended measure of recent returns, the market is in a Risk Off state.
The momentum figure here is the standard DMS weighted average, which blends the trailing 1, 3, and 6-month returns with half the weight on the 6-month leg. See the momentum FAQ for why it is built that way.
This indicator is a general market read. It is deliberately simple, it is stateless, and it is the same measure regardless of which strategy you happen to be looking at.
Individual strategies use their own gates
Here is the part worth understanding clearly: a strategy's own Risk On / Risk Off decision is not necessarily the same as the site-wide indicator.
Global Navigator, for example, considers both US and international equities. It goes Risk Off only when both fail to beat cash. So there are months where the site-wide indicator reads Risk Off, because US equities are lagging cash, while Global Navigator is fully Risk On and holding international equities, because those are beating cash comfortably.
Other strategies differ more still. Some use moving-average gates rather than momentum comparisons. Some have multiple sleeves that can be in different states simultaneously, so the strategy as a whole is neither wholly Risk On nor wholly Risk Off. Some use a canary asset, where an unrelated instrument acts as the trigger.
The site-wide indicator tells you the general weather. The strategy's allocation tells you what that strategy is actually doing, and the allocation is authoritative.
The signal is lagged deliberately
Signals are computed from the prior month's completed data, then applied to the month ahead. No strategy uses data from the month it is trading in, because that data does not exist yet when the decision has to be made.
This is a correctness requirement rather than a design preference. A backtest that decides January's allocation using January's returns is reporting results nobody could have achieved.
What being Risk Off does and does not mean
- It is not a market crash prediction. The gate is a comparison of recent returns. It fires when trends deteriorate, which sometimes precedes a decline, sometimes coincides with one, and sometimes turns out to be a false alarm.
- It is not necessarily cash. Most DMS strategies rotate into treasuries or other defensive assets rather than sitting in cash. What that defensive position holds varies by strategy and can be adjusted further by overlays like the Treasury Duration Limiter.
- It is not permanent. The gate is re-evaluated every month.
- It will sometimes be wrong. A gate that goes defensive just as the market turns up costs you the rebound. This is the whipsaw discussed in the Tactical Asset Allocation FAQ, and it is the unavoidable price of having any defensive rule at all.
Why the equity-versus-cash comparison
The comparison is not "are equities rising" but "are equities beating cash." Those are different questions, and the second is the one that matters to someone deciding where to put money.
Equities grinding out 1% a year while cash pays 5% are rising and are also the wrong place to be. Using cash as the reference point builds that judgment into the rule automatically, and it is what makes the same rule sensible across eras with wildly different interest rates.