How vulnerable is the market to a major decline?
Is a market crash actually beginning?
Keeping these questions separate is important. A market can become increasingly fragile without actually entering a crash.
1. Market Vulnerability Score — 0–100
The Market Vulnerability Score measures the underlying condition of the financial markets and identifies areas that could make the market susceptible to a significant decline.
It examines:
| Component | What It Monitors |
|---|---|
| Market Breadth | Advancing vs. declining stocks, percentage of stocks above their 50- and 200-day moving averages, and overall participation |
| Valuation & Concentration | Market valuations and the degree to which market performance depends on a relatively small group of large companies |
| Leverage | Margin debt, corporate leverage and potential financial-system leverage |
| Interest Rates | Treasury yields, the yield curve and rapid changes in interest rates |
| Liquidity | Financial conditions, market liquidity and potential funding stress |
| Credit | High-yield and investment-grade credit spreads and signs of credit deterioration |
| Monetary Policy | Federal Reserve policy and changes in financial-system liquidity |
| Economic Conditions | Employment, manufacturing, consumer activity and recession-related indicators |
| Inflation | CPI, PCE and other measures of inflationary pressure |
| Sentiment | Investor positioning, complacency and volatility conditions |
| Geopolitical/Exogenous Risks | Wars, energy disruptions and other major external shocks that could affect financial markets |
Vulnerability Score
🟢 0–24: Low vulnerability
🟡 25–49: Increasing vulnerability
🟠50–74: High vulnerability
🔴 75–100: Extreme vulnerability
A high Vulnerability Score does not mean that a crash is occurring. It means that the market contains a growing number of conditions that could make a future decline more severe.
2. Crash Confirmation Score — 0–100
The Crash Confirmation Score measures whether a significant market breakdown is actually developing.
It focuses on observable deterioration rather than simply identifying potential risks.
| Component | What It Looks For |
|---|---|
| VIX Acceleration | A rapid increase in volatility rather than simply an elevated VIX |
| Credit-Spread Acceleration | Rapid widening of high-yield and investment-grade spreads |
| Index Technical Breakdown | S&P 500, Nasdaq, Dow and Russell 2000 breaking important technical levels |
| Breadth Collapse | Sharp deterioration across the broader stock market |
| Volume Expansion | Abnormally heavy selling volume accompanying market declines |
| Failed Rebounds | Attempts to recover that repeatedly fail |
| Liquidity Deterioration | Evidence that financial-market liquidity is deteriorating |
| Cross-Market Confirmation | Stocks, credit, interest rates and other markets confirming the same deterioration |
Crash Confirmation Score
🟢 0–24: No meaningful crash confirmation
🟡 25–49: Early warning
🟠50–74: Significant breakdown developing
🔴 75–100: Broad crash conditions confirmed
Why Two Scores Are Used
The distinction between vulnerability and confirmation is one of the most important features of the dashboard.
For example:
| Vulnerability | Confirmation | Interpretation |
|---|---|---|
| 🟢 20 | 🟢 10 | Relatively healthy market conditions |
| 🟠65 | 🟢 20 | Fragile market, but no confirmed crash |
| 🟠65 | 🟠60 | Deterioration is becoming increasingly broad |
| 🔴 85 | 🔴 85 | Severe market stress with broad confirmation |
| 🔴 80 | 🟢 15 | Highly vulnerable, but not currently experiencing a confirmed crash |
This prevents the dashboard from treating every expensive market, weak breadth reading or elevated volatility reading as evidence that a crash is imminent.
The Most Important Warning Combination
Particular attention is given to the combination of:
Deteriorating breadth + rising VIX + widening credit spreads while the major indexes are still holding up.
This can indicate that weakness is developing underneath the surface before it becomes obvious in the major indexes.
The dashboard therefore looks for a progression such as:
Breadth deterioration → VIX acceleration → credit-spread widening → technical breakdown → heavy-volume confirmation
The more of these conditions occur together, and the more persistent they become, the more the Crash Confirmation Score increases.
What the Dashboard Is Intended to Show
The central purpose is to distinguish between two very different situations:
"The market is becoming vulnerable."
and
"The market is actually breaking down."
A market can remain strong while its internal risk factors deteriorate. Conversely, a sharp one-day decline does not necessarily constitute a systemic crash.
By separating Market Vulnerability from Crash Confirmation, the dashboard provides a framework for identifying deterioration early while avoiding the assumption that every warning signal will ultimately result in a crash.
No comments:
Post a Comment