The Crash Risk Index Slips Over To The Dark Side

Includes: DIA, QQQ, SPY
by: James Picerno

With the US stock market falling like a concrete blimp Wednesday, it's painfully obvious that darkness has descended across the equity landscape. Not surprisingly, the S&P 500 Crash Risk Index (a set of quantitative metrics collectively labeled as such on these pages) crossed the tipping point last Friday (Jan. 15) and will probably remain in an ominous posture once the carnage in Wednesday's action officially goes into the history books. Let's review a few details, if only for academic reasons.

Recall that the Crash Risk Index (CRI) has been flirting with the danger zone in recent months (see here and here for instance). But while CRI stepped up to the edge several times, it never crossed the 50% threshold, which is to say that no more than half the indicators slipped into the danger zone. (See this post for a list of metrics that comprise CRI). But at the end of trading last week, for the first time since the 2008-2009 crisis, more than half the indicators flashed a warning-six of the 10, to be precise.

Tuesday brought a brief reprieve, with the net profile ticking down to a 50/50 mix. But I bet that CRI will move back into the danger zone.

The implication? Bearish, of course. That's not terribly surprising, It's fair to say that we've seen a number of hints that trouble was brewing since last August, when the current phase of distress began in the wake of China's surprise currency devaluation.

The only question now - the last shoe to drop, so to speak - is whether the US has slipped into an NBER-defined recession. It's tempting to conclude no less. It wouldn't be surprising at this late date to discover that 2016 began with a new downturn. But that's still a speculative view for a simple reason: there's almost no January data to analyze at the moment.

As for December's numbers, which are relatively abundant, the macro trend remained in the positive column, albeit somewhat battered and bruised. Details to follow in Thursday's Business Cycle update.