The BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread and CBOE Russell 2000 Volatility Index (RVX) are good indicators of corporate bond and equity risk. When they start to rise off a strong base, make new highs and stick, and rise in tandem with prices, it's usually a good time to be defensive in the market. At extremes, these indicators measure fear and euphoria among market participants and can usually predict corrections and major turning points in the stock market. I put them up against the Wilshire 5000 Total Market Index to show you how the stock market reacted to their moves over a ten year period (Wilshire stock indexes don't have limited data on FRED). The chart below is interactive via the St. Louis Fed's FRED so you can adjust the date. The data is courtesy of Wilshire Associates, BofA Merrill Lynch, and CBOE.
BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread vs. Wilshire 5000 Total Market Index
CBOE Russell 2000 Volatility Index vs. Wilshire 5000 Total Market Index
I’m going to track a bunch of these indicators to try to predict major market moves and turning points in cycles. Using these indicators along with the technical indicators on StockCharts.com should improve the quality of my research. I will provide updates on these indicators in posts and create new indicators in the future to adapt to changing market and economic conditions.
(These FRED charts were reformatted on 11/16/2016)