The Financial Stress Index: A Tool for Monitoring Financial Stability

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There are several ways to stress test the market and to get a feel for overall strength of the overall economy and financials of the United States. Each have their own strengths and weaknesses.

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I specialize in stock market technical analysis because I am firm believer that the stock market prices events into the price of stocks well in advance. By following the money flow I have been able to successfully navigate the stock market for nearly two decades.

Earlier this week I talked about how the Tide Has Changed for US Stocks and what you should expect moving forward. But in saying that, this article shows you another very interesting way to gauge just how much financial stress the US financial system is currently under.

The “Financial Stress Index”, CFSI, is the Identification of todays’ “Systemic Risk Conditions”, which is maintained by the Federal Reserve Bank of Cleveland.

The CFSI tracks stress in six different types of markets: credit markets, equity markets, foreign exchange markets, funding markets, real estate markets and securitization markets.

The CFSI is a coincident indicator of systemic stress, where a high value of CFSI indicates high systemic financial stress. Units of CFSI are expressed as standardized differences from the mean (z-scores).

The CFSI also provides information about which markets are contributing to the increasing system stress by further analyzing the CFSI into a series for each of the component markets. Each market series can be further divided into the time series of each individual indicator that are placed into each market measure. Analysis of these subseries can provide further insight into the factors of stress.

The CFSI is designed to track distress levels within the U.S. financial system, on a continuous basis. Continuous monitoring gives financial-system supervisors the ability to monitor stressful episodes as they are shifting. Early detection is important because financial stress can quickly be amplified while stress is occurring, in more than one market.

Constructing the CFSI:

The CFSI combines 16 measures of conditions in six different major types. These 16 measures are described in Table 1 (below):

Chart 1

Today, we are in Grade 3 which reflects a “Moderate Stress Period” in which we are currently experiencing.  The financial markets are stressed out.  With these divergences, financial conditions are likely to continue deteriorating over time. This is a flashing red flag that we are at a major stock market and economic peak!

Here is a great video posted that shows exactly where the stock, gold, and oil markets are within this cycle and when prices are expected to change direction.

Concluding Thoughts:

What does this information mean?

A couple days ago I shared How you can Prepare’ For The Forthcoming Next 7 Months That We Are About to Experience in North America for both the stocks and the economy.

There are many reasons why the system is about to fail but a huge reason is because the Keynesian Economic Theory Failed which has been in place since 2008.

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Chris Vermeulen

[Image Courtesy of Pixabay]

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