The St. Louis Fed updated its weekly Financial Stress Index today.
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It looks pretty innocuous. According the fine folks who produce FRED, the big chart database, a reading below zero indicates low stress.
I look at this chart and think, “ho hum.”
But something told me to turn the chart upside down because most things the government or the Fed do work backwards from the way they’re supposed to. Because standalone charts just don’t do it for me, as usual, I plotted it with something else, in this case, the S&P 500. Lo and behold, I think I found a useful contrary leading indicator of long term stock market trends.
The turns in this index led stock prices by 6 months or so at the 2003 bottom, the 2007 top, and the 2009 bottom. Keep in mind that the index is inverted on the graph. Low stress is at the top of the chart and high stress in the lower portion. According to the indicator, we’ve been in a period of low stress for the past year. If the pattern of recent years holds, when the indicator begins to drop, especially when it falls below zero, the stock market is headed for a decline. It even seems to work with some of the more pronounced intermediate term corrections.
No indicator is perfect, and there’s not a lot of history here. But the pattern is interesting. It says no bear market just yet.
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