Leading Indicators Study Say's Bears are Still in Control

One indicator that I created a while back and have been following is called the "Leading Indicator Study."  No, these are not the economic data leading indicators, these are just different etfs of asset classes that represent the bullishness or bearishness of the market that tend to lead big moves.  It is based on the Euro (FXE), Copper (JJC), Small Caps (IWM), Emerging Markets (EEM), VIX (VIX or VXX), Long Term Treasuries (TLT), Short Term Treasuries (SHY) and Consumer Staples (XLP). 

I'm not going to go into exactly how this works, but I wanted to share the general idea...maybe it will spark some ideas with clever traders that look at such things to derive an edge.  The basic concept is to take risk sensitive asset classes, determine whether they are in an uptrend or downtrend, and then create a score based on the trends.  This particular indicator uses a couple of regression calculations to determine the trends and then it adds points for the bullish trends and subtracts points for the bearish.  Simple enough.  Regression is not necessary, you could easily use a moving average or volatility break out system in place of the regression.  The point is to look at multiple asset classes at the same time to get a heads up on what the market's current risk appetite is.

Here's a screen shot of the indicator paired with the S&P 500, note the colors of the price bars are indicative of the bullishness (green), bearishness(red), buycaution (yellow) and sellcaution(blue):

Hopefully you found this interesting and you can work out something similar or even better to implement with your own market analysis.  As you can see with the chart, price bars are red and the indicator score is a very low -92 which confirms the bearishness of the market.  That tells me not to get too excited about any rallies until this indicator gets back to bull territory.

TLT