History shows rather clearly that the stock market is prone to extreme events, aka crashes. The challenge is deciding when the risk for a repeat performance is unusually high… The leading factor, of course, is the business cycle but internal market issues can’t be ignored either. With that in mind, I’ve developed what I think of as a crash-risk index for the US stock market (S&P 500), which draws on signals from ten metrics that are reflecting different factors…
The above edited excerpts and the copy below comes from an article* by James Picerno as originally posted on SeekingAlpha.com under the title Estimating Crash-Risk Potential For The U.S. Stock Market. The comprehensive article can be read in its most enlightening entirety HERE.
HERE‘s a brief summary of the ten indicators, followed by a look at the historical record for the aggregated index. The ten metrics have a history of providing timely warnings, albeit not necessarily at the same time. That’s intentional, however, because, ideally, we should be looking at a broad set of indicators that exhibit a degree of independence from one another. In short, a diversified set of signals.
HERE‘s how the crash-risk index stacks up from the end of 1997 through yesterday (June 24) in chart form. Note that risk is currently (continue reading HERE).
All of the above leaves us with a question: Is the relatively high valuation in the stock market enough to create a severe market correction? Go HERE for the answer.
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