The next graph shows the Wilshire 5000 Total Market Index versus the 4-week Moving Average of Initial Claims, CBOE Russell 2000 Volatility Index and BofA Merrill Lynch High Yield Master II Option-Adjusted Spread since 2004. I multiplied the spread by 4 to make a better comparison on the graph, but you can see an unadjusted index version (100=12/7/2007 scale) here. The 4-week moving average of initial claims, which made a new low yesterday, is starting to diverge with the Russell 2000 volatility index and high yield bond option-adjusted spread a little bit (more so with RVX), which is a development that should be watched closely going forward. A prolonged divergence is especially negative for a market that hasn't had a correction in three years, in my opinion.
Lastly, we have the Main Street and Wall Street Anxiety Average, which averages together the 4-Week Moving Average of Initial Claims and the average of the CBOE Russell 2000 Volatility Index (RVX) and CBOE Nasdaq 100 Volatility Index (VXN). When the indicator made a new 3-year high in August of 2007, which was about five years into the cyclical bull market, it was confirming that the end of the bull market was near. And one week before that occurred, the indicator made a new 1-2-year high, which was also a warning sign. Today the indicator is far from making a new 3-year high, but not far from making a 1-2-year high.
I also found that simple technical analysis (downtrend breakouts) on the Main Street and Wall Street Anxiety Average predicted when the market would reverse course.
(The FRED charts above were reformatted on 11/17/2016.)
|Source: St. Louis Fed (customized and saved as an image via the graph above)|