Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Stocks: Stress Indices Tell Us When to Worry

By

With the Composite Indicator of Systemic Stress at an all-time low, does that mean we can kick back and relax?

PrintPRINT
One of the quotes that has been making the rounds lately is, "The only thing to worry about is that there isn't anything to worry about." That lack of concern is clearly evident among measures that are monitored by the Federal Reserve. Several of the individual branches of the Fed compute stress indices, like the following:
  • Cleveland Financial Stress Index
  • Chicago Fed Financial Conditions Index
  • St Louis Fed Financial Stress Index
  • Kansas City Fed Financial Stress Index
They monitor similar phenomena, so there is quite a bit of redundancy. The indices focus on stock prices, volatility, interest rates, credit
spreads, asset correlations, liquidity demands, systemic leverage, and more.

They're all essentially bounded from +2 (extremely high stress) to -2 (extremely low stress), with 0 being the baseline.

Typically, when the average gets near +1, we're at "the world's gonna end" kind of sentiment. When it gets to +3, that's pretty much the apocalypse, but inevitably, stocks bounce back.

When the average gets near -1, we're at "the country's firing on all cylinders, full speed ahead!" Whatever is beyond that is where we are now; the Composite Indicator of Systemic Stress (CISS) just hit a new all-time record low.

A few days ago, the Composite hit a level of -1.21, which has never been matched. It has approached -1.0 four other times: February/March 1977, August 1993, April/October 2006, and January/February 2007.

Of the 68 days the index has neared that level, the one-year return in the S&P 500 (INDEXSP:INX) was positive 29% of the time with a median return of -6.4%.

To be fair, the Composite was low, below -0.5 but not beyond -0.95, during much of the mid-1990s, and stocks rallied massively. But usually, the time to worry is when there is nothing to worry about.

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE