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St. Louis Fed Financial Stress Index Is A Great Long Term Leading Indicator For Stock Prices

The St. Louis Fed updated its weekly Financial Stress Index today.

St. Louis Fed Financial Stress Index Chart

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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.

St. Louis Fed Financial Stress Index and Stock Prices- Click to enlarge

St. Louis Fed Financial Stress Index and Stock Prices- Click to enlarge

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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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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