NIRP Crash Indicator Signals Very Reliable For 2016

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Summary

Lows for S&P during periods when orange and red signals were in effect averaged 1.7%.

S&P up an aggregate 15.2% during periods when yellow signal was in effect.

Largest decline while warning signal was in effect was 2.7% for the week ended September 13th.

The signal is due for a change, since it has been at yellow for 75 of last 76 days.

The NIRP Crash Indicator was a very reliable crash indicator for the ten-month period which began on March 1, 2016, and ended on December 30, 2016. The NIRP Crash Indicator became operational on March 1, 2016. The signal is due for a change. It has been at YELLOW since November 10, 2016, and for 75 of the last 76 days.

The NIRP crash signals:

  • ORANGE - pre-crash-imminent
  • YELLOW - caution
  • GREEN - clear

The declines based on the lows for the S&P 500 during the seven periods in which the RED or ORANGE warning signals were in effect ranged from 0.2% to 4.91% and averaged 1.78%. The maximum decline for the S&P for any of the eight warning periods was 2.7% for the week that began on September 6, 2016 and ended on September 13, 2016. The maximum increase for the S&P for any of the seven warning periods was 1.7% from November 9th to the 10th. During the periods that the NIRP Crash Indicator was at ORANGE or RED, the aggregate increase for the S&P 500 was 0.67%, a small percentage to pay for crash insurance.

Statistics for Periods NIRP Crash Indicator Warning Signals in Effect 3/1/16 to 12/30/16, Total Days, Days to Low, S&P 500 % Changes @ Low, and at End of Warning Period

Signal

Period

Total
Days

Days to Low

% Change
@ Low

% Change
@ Period End

ORANGE

4/01/16 - 4/22/16

15

4

-1.49%

0.91%

ORANGE

4/29/16 - 5/09/16

8

5

-1.00%

-0.63%

ORANGE

6/01/15 - 6/23/16

17

11

-0.89%

0.93%

RED

6/24/16 - 7/01/16

8

2

-4.91%

-0.04%

ORANGE*

7/26/16 -- 7/27/16

N/A

N/A

0.00%

0.00%

ORANGE

7/29/16 - 8/08/16

6

3

-1.0%

0.5%

ORANGE

9/06/16 - 9/13/16

5

4

-3.0%

-2.7%

RED

11/09/16-11/10/16

1

N/A

-0.2%

+1.7%

*Signal changed from YELLOW after the market closed and back to YELLOW before the market opened.

For the nine periods that the NIRP Crash Indicator's YELLOW signal was in effect, the aggregate increase for the S&P 500 was 15.2%, an average increase of 1.7% per period. The best-performing YELLOW period was March 1, 2016, through April 1, 2016, with an increase of 7%. The worst-performing period for the YELLOW was April 22 to April 29, 2015, with a decrease of 0.94%.

S&P 500 Performance Statistics for NIRP Crash Indicator: Periods When YELLOW Signal Was In Effect 3/1/16 to 12/30/16, Total Days and % Change for Period

Period

Total Period Days

% Change @ Period End

3/01/16 - 4/01/16

24

7.00%

4/22/16 - 4/29/16

4

-0.94%

5/09/16 - 6/01/16

15

1.71%

6/23/16 - 6/23/16

0

0.00%

7/01/16 - 7/26/16

16

3.5%

7/27/16 - 7/29/16

2

0.00%

8/08/16 - 9/06/16

22

0.15%

9/13/16 -11/09/16

40

0.6%

11/10/16 - 12/30/16

35

3.3%

The impetus for development of the NIRP Crash Indicator was my research conducted on negative rates and the extreme volatility they caused for the global markets from February through November 2016. See "Japan's NIRP Increases Global Market-Crash Probability," February 26, 2016.

For the NIPR Crash indicator to decrease from pre-crash ORANGE or full crash RED to caution YELLOW requires that the exchange rate between the yen and dollar be stable for an extended period of time, or that the dollar advance significantly versus the yen. An increase in the indicator from YELLOW to ORANGE requires a steady advance or a significant one-day advance of the yen versus the dollar. The NIRP Crash Indicator cannot go to an all-clear GREEN signal until the negative interest rate policies being utilized by the world's central banks and the negatively yielding securities trading in global markets have been eradicated. When the NIRP Crash Indicator was developed, there was no intention for there to be a "buy" signal other than GREEN. However, because of its proven reliability, the YELLOW signal, by default, became the buy signal for those who wish to trade the markets.

The primary metric that powers the NIRP Crash Indicator is the sudden increase in volatility of the exchange rates of the yen versus the dollar and other currencies. The significant changes in the yen to dollar exchange rate accurately predicted the crash of 2008 and recent declines of the markets to multi-year lows in August 2015 and February 2016. In my April 9, 2016, article entitled "Yen Volatility Puts Market on Precipice of Crash," and my video interview below entitled "Yen Volatility Causes Market Crashes," further details are provided on the phenomenon of the yen being a leading indicator of market crashes.

The only logical conclusion for yen volatility or its sudden and significant increases versus the dollar being a leading indicator of crashes is that the Japanese yen and the U.S. dollar are the world's two largest single-nation reserve currencies. For this reason, the yen is the best default safe haven currency utilized by investors during any U.S. and global economic and market crisis. When crises unfold, historically the U.S. dollar - by far the world's most liquid and largest safe haven currency - is susceptible to dramatic declines until the storm has passed.

Savvy investors know that the U.S. is unquestionably considered the world's leading economy and markets. They know that upon a crash of the U.S. stock market, the initial knee-jerk reaction would be a simultaneous crash of the U.S. dollar. Because Japan has the world's second leading single-nation currency, the yen is currently the default hedge currency. Even though the euro arguably ranks with the U.S. dollar as the world's top reserve currency for liquidity and circulation, it is not the preferred hedge against the greenback. The euro is shared by 19 of the European Union's member countries that have wide-ranging social and economic policies and political persuasions. For this reason, and also because Japan is considered to be one of the most fiscally conservative countries on the planet, the default currency is the yen. The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound sterling during times of crises because each of the underlying countries has economies much smaller than Japan's.

The only way to trade or hedge a currency is by pairing it with or tying the currency to another currency. Therefore, to effectuate the equivalent of a short sale for a currency (e.g., U.S. dollar) would require that the seller utilize dollars to purchase a currency (e.g., Japanese yen) that they believe will appreciate versus the paired currency (e.g., U.S. dollar).

Summary

The NIRP has been YELLOW for 75 of the last 76 trading days. Since the Trump honeymoon could soon be over, my prediction is that the signal will soon go to RED or ORANGE. See my December 2, 2016, SA post, "Will Hangover From Market's Party For Trump Last 2 Years?"

I am recommending the following leveraged short ETFS: the ProShares UltraShort Dow30 ETF (NYSEARCA:DXD), the ProShares UltraPro Short Dow 30 ETF (NYSEARCA:SDOW), the ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS) and the ProShares UltraPro Short S&P 500 ETF (NYSEARCA:SPXU). I am also recommending that the long Dow 30 (NYSEARCA:DIA) and the S&P 500 (NYSEARCA:SPY) and leveraged long ETFs for the Dow 30 (DDM, UDOW) and the S&P 500 (SSO, UPRO) be avoided.

For my predictions for 2017 and my top pick and my articles in support of them, see my January 1, 2017, article titled "2016 Review, 2017 Predictions And Top Pick."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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