Saturday, February 27, 2010

The TraderFeed Risk Asset Index: A Measure of Risk Asset Performance

Above I'm introducing what I'm calling the Risk Asset Index. It is an initial version of a proprietary measure that assesses the daily performance of risk assets.

The components of the index are emerging market stocks (EEM), U.S. stocks (SPY), oil (USO), Treasury rates ($TNX), and an inverse calculation for U.S. dollar (UUP).

Investors and traders are considered risk-seeking if we have rising EEM, SPY, USO, $TNX and falling UUP. They are considered risk-averse if we have falling EEM, SPY, USO, $TNX and rising UUP.

The index is calculated by adding the daily price changes in the five asset groups. One unique element of the index is that daily price changes are expressed as a function of recent volatility, so that the price changes are directly comparable. This also means that the index is sensitive to shifts in volatility patterns among risk assets.

We can see that the recent bounce in risk assets has only recovered a fraction of the decline since mid-January. On a long-term basis, we're within the broad range between the mid-2008 highs and the early 2009 low; failure to take out resistance in the 100 area would target a move back toward the midpoint of that range--a move which would likely see falling stocks, commodities, and Treasury rates and a rising U.S. dollar.

More on the Risk Asset Index and its applications soon to come.