The improved, de-trended Composite Market Health Index (CMHI)

One of our oldest and most consulted indicators by our institutional clients is the Composite Market Health Index (CMHI – see research paper ). By de-trending this index around its long-term regression mean we can obtain far earlier bear-market warnings and signalling for the U.S stock markets.

You can see this index updated every day from the CHARTS>MACRO>CMHI interactive chart.

Clicking on the “hamburger icon” on the top right of the chart lets you download all the data into Excel going back to 2014. If you require a longer-term history, you can get data on all our models going back to 1968 from the historical data file in the REPORTS>DATA FILES menu:

Here is an updated all-time history of the CMHI as the one in the old research note is a little outdated at the moment:

On calls with a few institutional clients, a concern was expressed as to the definite linear upward trend of this time series and if it needs to be accounted for to preserve integrity of its signalling for a bear market. The below chart de-trends the CMHI around its long-term regression trend, which provides for more timely warnings across the entire time spectrum, especially after 1999 and most certainly after 2015:

We do not need concern about an upward (or downward) sloping long-term CMHI trend to justify using de-trended data. If you examine the history of the CMHI, we see the current upward sloping linear regression trend is a result of the lower highs printed pre-1983. Sure enough, if we just examine data post-1983, we get a near-perfect horizontal regression trend (at around +0.3 level) that also proves more useful in early bear-market warnings than using the traditional zero line:

Despite the fact that the CMHI ranges between -1 and +1, it makes sense that its regression is above zero, since the stock market, and hence all the CMHI components, is going up more than it is going down. The bull markets are gradual and long and the bear markets are sharp and short. The saying “The bull climbs the stairs and the bear comes down the elevator” comes to mind.

We are more inclined to use the horizontal de-trending than the sloped one since we believe that over time the linear regression will eventually flatten itself from the current long term trend. It appears that monitoring CMHI pivots around its longer term horizontal regression trend line at +0.3 is equally as important as observing its pivots around the zero level – at least it appears far more constructive at this stage. This level will be added as a horizontal line in the interactive CMHI chart in the near future to assist in this regard.

De-trended or not, the CMHI is firmly in bull-market territory post the December 2018 stock market correction, although declining since 3rd May 2019.

About RecessionALERT

Dwaine has a Bachelor of Science (BSc Hons) university degree majoring in computer science, math & statistics and is a full-time trader and investor. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT into a company used by hundreds of hedge funds, brokerage firms and financial advisers around the world.

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