Composite Risk Indicator (CRI)
The Composite Risk Indicator is a sophisticated tool designed to assess market risk by analyzing the spreads between various asset classes, now including key currency pairs. This indicator synthesizes information from multiple domains—equities, bonds, and currencies—normalizing each on a scale from 0 to 100, where higher values represent higher perceived risk. It provides a comprehensive measure of market sentiment and risk exposure.
Key Components of the CRI:
Equities and Bonds:
Stock Market to Bond Market Spread (SPY/BND): Measures the performance of stocks relative to bonds, indicating market optimism and risk levels.
Junk Bond to Treasury Bond Spread (HYG/GOVT) and Junk Bond to Investment Grade Bond Spread (HYG/LQD): Reflect the market's risk tolerance within the bond sector.
Growth to Value Spread (VUG/VTV): Evaluates the preference for growth stocks versus value stocks.
Tech to Staples Spread (XLK/XLP): Highlights risk preferences within equity sectors.
Small Cap Growth to Small Cap Value Spread (SLYG/SLYV): Provides insight into risk levels in smaller companies.
Currencies:
Australian Dollar to Japanese Yen (FXA/FXY): This spread offers insights into risk sentiment between growth-oriented and safe-haven currencies.
Australian Dollar to US Dollar (FXA/UUP): Measures the performance of a growth-linked currency against the world's reserve currency, reflecting broader economic trends.
Utility:
This indicator is particularly useful for investors and traders looking to gauge overall market sentiment, identify shifts in risk appetite, and make informed decisions based on a broad assessment of market conditions. It serves as a valuable addition to investment analysis and risk management strategies, offering insights not just from traditional stocks and bonds but also from the forex market.