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November 12, 2014

Macro Market Risk Index Rebounded from 2014 Low

By James Picerno of The Capital Speculator
The US economic trend remained positive in early November, rebounding from last month’s decline, according to a markets-based estimate of macro conditions. The Macro-Markets Risk Index (MMRI) closed at +8.2% yesterday (Nov. 10). The index’s revival comes after briefly dipping in mid-October to the lowest level so far in 2014. But even at last month’s trough, MMRI remained positive. The benchmark’s continued run of readings above zero through yesterday suggests that business cycle risk remains low. A decline below 0% in MMRI would indicate that recession risk is elevated. By comparison, readings above 0% imply that the economy will expand in the near-term future.
MMRI represents a subset of the Economic Trend & Momentum indices (ETI and EMI), a pair of benchmarks that track the economy’s broad trend for signs of major turning points in the business cycle via a diversified set of indicators. (For details about ETI and EMI, see Nowcasting The Business Cycle.) Analyzing the market-price components separately offers a real-time approximation of macro conditions, according to the “wisdom of the crowd.” Why look at market data for insight into economic conditions? Timely signals. Conventional economic reports are published with a time lag. MMRI is intended for use as a supplement for developing perspective on the current month’s economic profile until a complete data set is published.
MMRI measures the daily median change of four indicators based on the following calculations:
• US stocks (S&P 500), 250-trading day % change, plotted daily
• Credit spread (BofA ML US High Yield Master II Option-Adjusted Spread), inverted 250-trading day % change, plotted daily
• Treasury yield curve (10-yr Treasury yield less 3-month T-bill yield), no transformation, plotted daily
• Oil prices (iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)), inverted 250-trading day % change, plotted daily
Here’s how MMRI compares on a daily basis since August 2007:
Here’s a closer look at how MMRI compares on a daily basis over the past year:

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

About the Author - James Picerno is a veteran financial journalist since the early 1990s at Bloomberg, Dow Jones, etc. before becoming an independent writer/analyst/consultant in 2008.  James is also the author of Dynamic Asset Allocation (Bloomberg Financial, 2010) and he writes at The Capital Speculator(EconMatters author archive here)

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