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Wednesday, September 19, 2012

FED financial stress indexes

The Kansas City and St. Louis FED branches both put out financial stress indexes that are similar, but different.  Readings below 0 are low stress, above 0 higher stress.



In http://traderbob58.blogspot.com/2012/08/vix.html I talked about the very low VIX readings we are seeing.  There were periods in the mid 90s and mid 2000s where the VIX stayed at very low levels.  Looking at these two financial stress charts we can see that both were below zero and stable throughout both of those periods of ultra low VIX.  We clearly do not have that situation today.  The St. Louis index has been above zero most of the time since 2009.  The Kansas City index has been below zero more of the time, but has had sudden increases above zero since 2009. I don't see any sign in these charts we are headed into quiet financial waters and an extended period of low VIX.  I am not sure why the St. Louis index has been above zero all year, despite the major stock rallies.  Both are higher then they were last year before the meltdown. 

Looking back at the late 90s, the Kansas city index is interesting.  That was a period of high VIX and rising prices.  Notice the index was above zero continuously after 1998.  Somewhat similar to what the St. Louis index is doing now.  Even though it started the 2000 bear market above zero, it never went wild like it did in the 2007 bear market. 

Any stock market sell off where both of these charts stay below zero is a no brainer buying op. Corrections where both are clearly trending down or only one crosses above zero should also be a great time to buy.  During serious market corrections where both indexes cross above zero, a little more caution is warranted.  In the 2000 bear market, there were two significant rallies where neither index crossed below zero and both rallies ended in new lows.  There was only one significant rally like that in the 2007 bear market.
These charts also show how sudden the troubles appeared in 2007.   We went from very calm waters to a whole heap of trouble in very short order.

I just recently found these and I think they provide some useful information.  It appears best to look at both of them together.


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