The **Financial Crisis Predictor - Doomsday Clock** is a composite indicator that evaluates multiple market conditions to determine financial risk levels. It combines four key metrics: market volatility (via VIX), yield curve spread, stock market momentum, and credit risk (via high-yield spread). Each metric contributes to a weighted "risk score," scaled between 0 and 100, which helps gauge the probability of a financial crisis. Here's a breakdown of how it works:
### 1. **Market Volatility (VIX)** - **How it's measured:** - Uses the VIX index, which represents expected market volatility. - Applies two exponential moving averages (EMAs) to smooth out the data—one fast and one slow. - Triggers a signal if the fast EMA crosses above the slow EMA and VIX exceeds a defined threshold (default is 30). - **Weighting:** - Contributes up to 35% of the total risk score when active.
### 2. **Yield Curve Spread** - **How it's measured:** - Takes the difference between the yields of 10-year and 2-year U.S. Treasury bonds (inversion indicates recession risk). - If the spread drops below a certain threshold (default is 0.2), it signals a potential recession. - **Weighting:** - Contributes up to 25% of the risk score.
### 3. **Stock Market Momentum** - **How it's measured:** - Analyzes the S&P 500 (SPY) using a 20-day EMA for price momentum. - Checks for a cross under the 20-day EMA and if the 5-day rate of change (ROC) is less than -2. - This combination signals bearish market momentum. - **Weighting:** - Contributes up to 20% of the risk score.
### 4. **Credit Risk (High Yield Spread)** - **How it's measured:** - Assesses high-yield corporate bond spreads using EMAs, similar to the VIX logic. - A crossover of the fast EMA above the slow EMA combined with spreads exceeding a defined threshold (default is 5.0) indicates increased credit risk. - **Weighting:** - Contributes up to 20% of the total risk score.
### 5. **Risk Score Calculation** - The final **risk score** ranges from 0 to 100 and is calculated using the weighted sum of the four indicators. - The score is smoothed to minimize false signals and maintain stability.
### 6. **Risk Zones** - **Extreme Risk:** If the risk score is ≥ 75, indicating a severe crisis warning. - **High Risk:** If the risk score is between 15 and 75, signaling heightened risk. - **Moderate Risk:** If the risk score is between 10 and 15, representing potential concerns. - **Low Risk:** If the risk score is < 10, suggesting stable conditions.
### 7. **Visual & Alerts** - The indicator plots the risk score on a chart with color-coded backgrounds to indicate risk levels: green (low), yellow (moderate), orange (high), and red (extreme). - Alert conditions are set for each risk zone, notifying users when the risk level transitions into a higher zone.
This indicator aims to quickly detect potential financial crises by aggregating signals from key market factors, making it a versatile tool for traders, analysts, and risk managers.
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