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St. Louis Fed is Doing It Backward

Each week the St. Louis Fed produces what it calls the Financial Market Stress Index. It issues a press release updating the index. This week it read like this.

Financial market stress fell slightly over the previous week, according to the St. Louis Fed Financial Stress Index (STLFSI). For the week ending April 3, 2015, the STLFSI measured -1.072, down from the previous week’s revised value of -1.068. This is the third consecutive weekly decline.

It explains:

The St. Louis Fed Financial Stress Index (STLFSI)

The STLFSI measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together.

How to interpret the index
The average value of the index, which begins in late 1993, is designed to be zero. Thus, zero is viewed as representing normal financial market conditions. Values below zero suggest below-average financial market stress, while values above zero suggest above-average financial market stress.

And their chart.


Low stress. Ho hum, right?

Not so fast! Because, you see, they’re doing it backward.

St. Louis Stress Index Inverted - Click to enlarge

St. Louis Stress Index Inverted – Click to enlarge

Technical analysts and market chartist call that orange line since the middle of last year a negative divergence. Last time there was one lasting as long as this was in 2007. Apparently it works well at bottoms too, with months long positive divergences developing ahead of stock market turns.

Useful? I’ll let you be the judge.

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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