The first ULTRA Cyclical Fear Indicator adds together: 1) the average of the year-over-year percent changes in selected consumer price indexes (all items + gasoline + energy + food + rent); 2) the average of the CBOE Russell 2000 Volatility Index (RVX) and CBOE Nasdaq 100 Volatility Index (VXN); 3) the average of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread and BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread; and 4) subtracts the 10-2 year Treasury yield spread. I also showed the indicator's percent change from a year ago. The embedded charts are from the St. Louis Fed's database (FRED) and the data is courtesy of BofA Merrill Lynch, CBOE and BLS. The ULTRA Cyclical Fear Indicators get updated monthly and the Wilshire 5000 gets updated weekly, so keep in mind the lag.
A bearish divergence between the Wilshire 5000 Total Market Index and the ULTRA Cyclical Fear Indicator has historically predicted market corrections and major cycle turns. Right now the indicator is starting to rise in tandem with the market mainly because of the inflation component, which also occurred during the previous bull market. But when you see the market start to trade sideways and diverge with a rising indicator, I think you should expect a sizable market correction in the near- to intermediate term.
Wilshire 5000 (weekly) vs. ULTRA Cyclical Fear Indicator (monthly)
Wilshire 5000 (weekly) vs. ULTRA Cyclical Fear Indicator's Percent Change from a Year Ago (monthly)
Wilshire 5000 (weekly) vs. ULTRA Cyclical Fear Indicator 2 (monthly)
The second ULTRA Cyclical Fear Indicator uses the 'Average of RVX and VXN'/VIX (I have a separate indicator devoted to that ratio as an exhaustion indicator). It's good at predicting market turns as well.
Wilshire 5000 (weekly) vs. ULTRA Cyclical Fear Indicator 2's Percent Change from a Year Ago (monthly) (adjusted)
I think the second ULTRA Cyclical Fear Indicator's percent change from a year ago is the best ULTRA indicator for the market. I had to leverage the (Avg of VXN and RVX)/VIX ratio by five to clean up some messy negative YoY percentages that occurred in 2010. Look how it accurately predicted corrections and the top of the market in 2007.
Go back to the original Cyclical Fear Indicator.
(These FRED charts were reformatted on 11/17/2016.)