Building a Market Crash Dashboard

 

One of the questions I’ve been trying to answer is whether there are warning signs that show up before a major market selloff.

There probably isn’t a single indicator that can reliably tell you a crash is coming. History makes that pretty clear. The crashes of 1987, 2000–2002, 2008, and 2020 had very different causes and developed in very different ways.

But there are certain things that tend to happen when the market starts becoming unhealthy.

That led me to build a Market Crash Dashboard.

The goal isn't to predict the next crash. It is to identify when enough warning signs are appearing at the same time that I should become more cautious.

The Dashboard

I’m using a 0–100 stress score.

• 0–20: Normal

• 21–40: Caution

• 41–60: Elevated

• 61–80: High Stress

• 81–100: Extreme Stress

The score is made up of several different areas of the market. No single category is supposed to determine the outcome.

The idea is simple: the more areas that begin flashing warning signs at the same time, the more seriously I take the overall signal.

1. Market Breadth

Breadth may be the most important part of the dashboard.

The S&P 500 can look perfectly healthy even when a surprisingly small number of stocks are doing the heavy lifting.

I want to know:

• What percentage of S&P 500 stocks are above their 20-day moving average?

• How many are above their 50-day?

• How many are above their 200-day?

• Are new highs expanding or shrinking?

• Are new lows beginning to increase?

• What is happening with the advance/decline line?

• Are small-cap stocks participating?

• Is the equal-weight S&P 500 keeping up with the cap-weighted index?

One of the warnings I’m particularly interested in is when the major indexes continue making new highs while fewer and fewer stocks participate.

That doesn't mean a crash is coming. Markets can continue higher for quite a while with narrow leadership.

But it tells me that the market's foundation may not be as strong as the headline index suggests.

2. Volatility

The VIX gets most of the attention, but simply looking at the VIX level isn't enough.

I want to know whether volatility is increasing or decreasing and what the volatility curve is telling us.

The dashboard will monitor:

• VIX

• VIX relative to its 20-, 50-, and 200-day averages

• VIX9D

• VIX3M

• The VIX futures curve

• Contango or backwardation

• VVIX

• SKEW

A VIX of 25 means something different when it is falling from 40 than when it is climbing from 15.

That's an important distinction.

3. Credit Markets

This is another area I don't want to overlook.

The stock market sometimes looks fine right up until problems start showing up somewhere else.

Credit markets can provide an early warning.

I'll be watching:

• High-yield credit