Tag: Chicago Fed National Financial Conditions Index

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US Market Leading Indicators

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market drawdown risk.

Bull/Bear Market

The Bull/Bear indicator remains at 60%, with two of five leading indicators signaling risk-off:

Bull-Bear Market Indicator

The Chicago Fed National Financial Conditions Index declined to -0.51, reflecting strong liquidity in financial markets. Values above zero indicate restrictive financial conditions.

Chicago Fed National Financial Conditions Index

Weekly continued claims are climbing, warning of a deteriorating labor market despite the low 4.1% unemployment rate.

Continued Claims & Unemployment Rate

Stock Pricing

Stock pricing eased slightly to 97.34 percent, compared to a low of 95.04 percent in April and a high of 97.79 percent in February. The extreme reading warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Robert Shiller’s CAPE compares the current value of the S&P 500 index to inflation-adjusted earnings for the preceding 10 years. The multiple of 37.69 is similar to the last leg of the Dotcom bull market in 1999, warning that stocks are dangerously overpriced.

Robert Shiller's CAPE 10 Ratio

Conclusion

We are bordering on a bear market, with the bull-bear indicator at 60%. However, extreme stock pricing increases the risk of a significant drawdown.

Acknowledgments

Notes

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Bitcoin blast-off bullish for S&P 500

Summary

  • Bitcoin reaches a new high
  • The bullishness is expected to spill over into stocks

Bitcoin blasted through resistance at 110K, reaching a new high at 117.6K, signaling a surge of animal spirits in financial markets.

Bitcoin (BTC)

The result is bound to be bullish for US stocks. The S&P 500 recovered above 6250, while higher Trend Index troughs signal buying pressure.

S&P 500

A breakout of the Dow Jones Industrial Average above 45K would confirm the S&P 500 bull market signal.

Dow Jones Industrial Average

Financial Markets

The Chicago Fed National Financial Conditions Index decreased to -0.51 on July 4, signaling easy monetary conditions.

Chicago Fed National Financial Conditions Index

Dollar & Gold

The US Dollar Index is retracing to test resistance at 98. Respect will likely confirm the downtrend. Our target is 90.
Dollar Index

Gold continues its bullish consolidation between 3200 and 3430. An upward breakout would strengthen our target of 4000 by year-end.

Spot Gold

Silver broke out from its recent pennant consolidation at 36, offering a short-term target of 39. Rising Trend Index troughs indicate buying pressure.

Spot Silver

Conclusion

Bitcoin warns of a sharp rise in bullish sentiment.

A Dow breakout above 45K would confirm a bull market.

This reminds us of the final leg of the bull market during the Dotcom bubble, from 1999 to 2000. It was great for traders but terrible for investors.

Acknowledgments

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S&P 500 breakout but no buy signal

Summary

  • The S&P 500 and Nasdaq reached new highs, but the Dow has not yet confirmed the breakout
  • Liquidity is strong, and long-term Treasury yields are softening
  • But the Conference Board Leading Economic Index warns of a recession
  • The dollar keeps falling, and demand for gold remains strong, flagging high levels of uncertainty

The S&P 500 broke resistance at 6100 to reach a new high. Expect retracement to test the new support level, but respect will likely signal a fresh advance.

S&P 500

The Nasdaq 100 ETF (QQQ) has also reached a new high.

Invesco Nasdaq 100 ETF (QQQ)

However, the Dow Jones Industrial Average lags and has not yet confirmed the new breakout.

Dow Jones Industrial Average

The broad Dow Jones US Index (DJUS) still lags the DJ World-x-US Index (W2DOW).

DJ US Index ($DJUS) & DJ World ex-US ($W2DOW)

Financial Markets

The Chicago Fed National Financial Conditions Index declined to -0.51 on June 20, signaling improving financial conditions.

Chicago Fed National Financial Conditions Index

10-year Treasury yields declined to 4.25%, providing further support for stocks.

10-Year Treasury Yield

Economy

The Conference Board’s leading economic index (LEI) declined to 99.0% in May. Six-month growth in the LEI (blue) fell to an annualized -5.4%, below the -4.1% that triggers a recession signal (marked in red).

Conference Board Leading Economic Index - Recession Signals

The black line on the above chart indicates negative growth in more than 50% of the LEI components over the past six months, which confirms the recession signal.

Conference Board Leading Economic Index - Components

Manufacturers’ new orders, excluding defense and aircraft, are one of the few LEI components that did not decline over the past 6 months. However, they show a steep long-term downtrend when adjusted for inflation (PPI for capital goods).

Manufacturing New Orders: Non-Defense Capital Goods Excluding Aircraft/PPI for Capital Equipment

New orders for consumer goods, adjusted by CPI, are also declining.

Manufacturing New Orders: Consumer Goods/CPI

Dollar & Gold

The dollar continues to weaken, with the US Dollar Index breaking support at 98 to confirm our target of 90.

Dollar Index

Gold is consolidating between $3,200 and $3,400 per ounce. Declining Trend Index peaks warn of secondary selling pressure, and another test of support at $3,200 is likely. Respect of support would signal another test of resistance at $3,500.

Spot Gold

Silver is consolidating in a narrow pennant at $36 per ounce. A retracement to test the new support level at $34 remains likely, but follow-through above $37 would signal another advance.

Spot Silver

Conclusion

A breakout of the Dow Jones Industrial Average above 45K would signal another advance for stocks, but the Conference Board Leading Economic Index warns of a recession. Manufacturers’ new orders for non-defense capital goods and consumer goods both display long-term weakness.

10-year Treasury yields softened to 4.25%, and financial conditions are easing, supporting stock prices. However, a declining dollar and strong gold price continue to warn of uncertainty. We don’t see this as a buy opportunity for investors; extreme stock valuation levels continue to warn of elevated risk of a significant drawdown.

Acknowledgments

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US Market Leading Indicators

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.

Bull/Bear Market

Our Bull/Bear Market indicator remains at 60%, with two of five leading indicators signaling risk-off:

Bull-Bear Market Indicator

The unemployment rate remains at a low 4.2% in May, but weekly continued claims climbed to 1.945 million on June 7, warning that the labor market is deteriorating.

Continued Claims & Unemployment Rate

However, monetary conditions are easing. The Chicago Fed National Financial Conditions Index declined to -0.52 on June 13, signaling improved financial conditions.

Chicago Fed National Financial Conditions Index

Stock Pricing

Stock pricing eased slightly to 96.30, compared to a low of 95.04 nine weeks ago and a high of 97.79 percent in February. The extreme reading warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

We are in the early stages of a bear market, with the bull-bear indicator at 60%. Stock pricing is extreme, indicating risk of a significant drawdown.

Acknowledgments

Notes

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Big Beautiful Bill threatens bond market blowout

Summary

  • The bond market reacted to the record tax and spending bill in Congress that extends tax cuts for corporations and the wealthy
  • The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to the US federal debt, depending on whether policymakers extend temporary provisions
  • A weak bond auction lifted long-term yields
  • The dollar fell, while gold climbed above 3300

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

~ James Carville, political consultant and lead strategist for Bill Clinton’s successful 1992 presidential campaign.

10-Year Treasury Yield
Weak bond auction

A $16 billion auction of 20-year Treasury bonds on Wednesday attracted less than usual interest, with yields rising to 5.127% after the auction.

“We’ve seen several soft 20-year bond auctions and it has a checkered history as a benchmark issue,” said Thomas Simons, chief U.S. economist at Jefferies in New York. “This one was not one of the best by any stretch of the imagination, but it also wasn’t one of the worst.”

Simons said while the auction was “far from a disaster,” it showed there was not going to be a reversal in the sell-off at the long end of the yield curve anytime soon. (Reuters)

Why is this a problem?

Liz Ann Sonders, Charles Schwab’s chief investment strategist, responded to a question on CNBC:  Is 4.58% on the 10-year a problem for the bond market?

It’s not so much the level that matters, it’s the “Why?” If this was driven by the growth trajectory, that would be great. But the fact is it’s driven by uncertainty with regard to inflation, and the Fed’s expected reaction. The wattage on the spotlight aiming at the debt and deficit has been turned up. The investor class cares deeply about this issue but the average voter can’t even conceptualize what 30-plus trillion dollars means and doesn’t tend to vote based on this. This spotlight on the issue is a good thing and will increase the chance that something gets done.

President Trump’s “big, beautiful” tax bill

The House Rules Committee advanced President Trump’s “big, beautiful” tax bill late Wednesday after 21 hours of debate and amendments, sending the legislation to the floor where it is expected to receive a final vote early Thursday morning.

The package includes a major spending increase for immigration enforcement and the military, and it would extend Trump’s 2017 tax cuts, which are scheduled to expire at the end of this year. It includes a series of cuts to Medicaid, food assistance, and clean energy funding to pay for the trillions of dollars in tax cuts and new red ink. (CNBC)

The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to US federal debt by 2034, depending on whether policymakers extend temporary provisions. (Reuters)

Rep. Chip Roy, R-Texas, and House Freedom Caucus chair Andy Harris, R-Md., were among the members who met with Trump at the White House Wednesday afternoon, in a hastily arranged effort to convince fiscal hawks to set aside their objections and back the deficit-exploding package of tax cuts.

Meanwhile, markets tumbled on concerns that Trump’s spending bill would pass, leading to exploding federal deficits and weaker long-term fiscal health. The yield on the 30-year Treasury bond hit 5.09%. (CNBC)

The Dollar & the Dow

The dollar weakened, with the US Dollar Index breaking below 100. Follow-through below 98 would warn of a long-term decline with a target of 90.

Dollar Index

The Dow Jones Industrial Average closed below its former primary support level at 42K. A follow-through below 41.5K would close the recent gap, signaling another test of primary support at 37K.

Dow Jones Industrial Average

Financial Markets

Recent weakness comes despite a sharp recovery in liquidity, with the Chicago Fed National Financial Conditions Index falling to -0.58.

Chicago Fed National Financial Conditions Index

Bitcoin also reached a new high of 110K, signaling a sharp increase in risk appetite in financial markets.

Bitcoin (BTC)

Gold & Physical Demand

Gold climbed above 3300, headed for a test of the resistance band between 3400 and 3500. A breakout would strengthen our target of 4000 by the end of 2025.

Spot Gold

A 700% year-over-year spike in COMEX physical gold deliveries in May 2025 (16,000 contracts, $5.3 billion), the largest in history, reflects unprecedented physical demand from institutions, possibly including the US government or Treasury. Despite the recent correction, gold’s rally to 3300 demonstrates resilience, with physical demand overwhelming paper price suppression. (Andy Schectman)

Conclusion

President Trump’s “big, beautiful tax bill” threatens a bond market revolt, with a steep rise in long-term Treasury yields if passed. The 10-year Treasury yield respected support at 4.5%, warning of a test of resistance at 5.0%.

Rising long-term yields would likely cause a sharp fall in the Dow and S&P 500.

The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to US federal debt by 2034, depending on whether policymakers extend temporary provisions.

The dollar is weakening, and breakout of the US Dollar Index below 98 would confirm a long-term decline with a target of 90.

Gold is rising, and a breakout above 3500 would strengthen our long-term target of 4000 by the end of 2025.

Acknowledgments

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US Weekly Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

Our Bull/Bear Market indicator is unchanged at 60%, with two of the five leading indicators signaling risk-off:

Bull-Bear Market Indicator

We replaced the Coincident Economic Activity Index with Current Economic Conditions from the University of Michigan’s monthly consumer survey. The UOM index offers earlier recession warnings—when the 3-month moving average crosses below 100—and more timely updates.

University of Michigan: Current Economic Conditions

The current reading of 68.20 is a strong bear signal. The Fed Funds target rate is also in a bear cycle, but the two require confirmation from one of the following two indicators:

If the Chicago Fed Financial National Conditions Index rises above -0.40.

Chicago Fed National Financial Conditions Index

Or the S&P 500 30-week Smoothed Momentum crosses below zero.

S&P 500

Stock Pricing

Stock pricing eased slightly to the 95.67th percentile from a high of 97.79 six weeks ago. However, the extreme reading still warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

 

Conclusion

There’s little change this week. We are close to a bear market, with the bull-bear indicator at 60%. Stock pricing is still extreme, highlighting the risk of a significant drawdown.

Acknowledgments

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Fed sits tight as economic outlook darkens

The Fed has kept the funds rate steady at 4.25% to 4.5% since December. The threat of a trade war and the increased risk of a sharp price jump have ensured Fed caution over further rate cuts. The FOMC dot plot below shows four participants expect no cuts this year, another four expect one cut of 25 basis points, and eight more expect a total of 50 basis points.

FOMC Dot Plot

FOMC projections identify rising uncertainty over GDP growth and greater risk of an undershoot.

FOMC: GDP Risk

Consumer expectations of inflation soared in the March University of Michigan survey, with the median price increase in the next year jumping to 4.9%.

University of Michigan: 1-Year Inflation Expectations

Expectations of future conditions fell sharply to 54.2.

University of Michigan: Consumer Expectations

Stocks were buoyed by Fed Chair Jerome Powell’s view that tariff-driven inflation will be “transitory” and largely confined to this year. (Reuters)

The Dow Industrial Average rallied to test resistance at the former primary support level of 42,000.

Dow Jones Industrial Average

The S&P 500 recovered some ground but encountered resistance at 5700, below the former primary support level.

S&P 500

Long-term Treasury yields benefited from the outflow from equity markets in February and March, with the 10-year testing support at 4.1% before increasing to 4.25%. A further fall in stocks would likely cause a short-term softening of UST yields.

10-Year Treasury Yield

Upward pressure on US Treasury yields will likely come from doubts over the current administration’s economic strategy and concerns over a debt-ceiling stoush. US credit default swap spreads (CDS) have increased by 200% since December.

United States Treasury: 1-Year Credit Default Swaps

A sharp upturn in the Chicago Fed National Financial Conditions Index warns of tightening financial conditions, with credit spreads widening.

Chicago Fed National Financial Conditions Index

The Fed confirmed they will reduce the monthly redemption cap on Treasury securities from $25 billion to $5 billion. This will slow the withdrawal of liquidity from the Treasury market through the QT program.

Conclusion

The Treasury market has shown that it is still vulnerable to thin demand and requires Fed support to maintain liquidity in the long-term end of the curve. The Fed has been forced to cut monthly QT for Treasury securities to $5 billion. At the new rate, it would take the Fed more than 70 years to shed its present holdings of $4.24 trillion.

Fed Security Holdings

Stocks are rallying but are unlikely to reverse the recent bear market signal.

Acknowledgments

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US Weekly Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.

Bull/Bear Market

The Bull/Bear Market indicator rebounded to 60%, due to data revisions to heavy truck sales. Two of the five leading indicators now signal Risk-off:

Bull-Bear Market Indicator

Heavy truck sales were revised up to a seasonally adjusted 37,823 units in December, after an earlier report at 35,152 units. January sales jumped to a hot 44,499 units confirming that economic activity is not slowing.

Heavy Truck Sales (units)

This is the second time that a heavy trucks data revision has affected our model. We will investigate using a 3-month moving average to reduce the impact of revisions.

Stock Pricing

Stock pricing eased slightly to 97.75 from the 97.91 percentile two weeks ago. The extreme reading continues to warn that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

We are close to a bear market, with the bull-bear indicator revised to 60%. Stock pricing remains extreme, increasing the risk of a significant drawdown, warning not to increase exposure to risk assets like growth stocks.

Acknowledgments

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Fed takes a pause

Fed Chair Jerome Powell announced that the FOMC has left the fed funds target range unchanged at 4.25% to 4.5%.

Powell described the labor market as “pretty stable and broadly in balance,” with a low hiring rate and an equally low quit rate.

Quit Rate

The key question for investors in the post-announcement news conference. Axios: “Was there any discussion on the timeline for ending the QT program?”
Powell responded that their indicators suggest that reserves are still abundant, and the Fed would continue with QT until that changes.

Commercial bank reserves at the Fed reached $3.33 trillion on January 22.

Commercial Bank Reserves at the Fed

However, the decline in bank reserves is expected to accelerate as the rundown in overnight reverse repo (RRP) liabilities nears an end. The reduction in RRP caused money market funds to invest more than $2 trillion in T-Bills over the past two years, effectively offsetting the withdrawal of liquidity via QT.

Fed Reverse Repo (RRP) Liabilities

Financial market conditions currently signal abundant liquidity, with the Chicago Fed Index falling to -0.65. However, that could reverse as the Fed persists with its rundown of securities on its balance sheet.

Chicago Fed National Financial Conditions Index

We will continue with weekly charts for the present as they help to keep daily volatility in perspective.

The 10-year Treasury yield (TNX) below has found support at 4.5%, and respect would signal an advance to 5.0%.

10-Year Treasury Yield

The S&P 500 is testing resistance at 6100. Selling pressure is secondary, and breakout will likely offer a target of 6400.

S&P 500

Dollar & Gold

The Dollar Index (DXY) found short-term support at 107. Recovery above 108 would indicate another test of 110. Broad imposition of tariffs would likely signal the continuation of the long-term uptrend.

Dollar Index

Gold is testing resistance at $2,800 per ounce after a bullish shallow correction. Breakout would offer a target of $3,000.

Spot Gold

Silver remains bearish, testing support at $30, with the trend direction uncertain until a breakout above $32.

Spot Silver

Conclusion

The Fed is likely to keep rate cuts to a minimum for as long as the labor market remains “in balance.”

Liquidity is likely to have a greater impact on financial markets, with an expected contraction in 2025, which is bearish for stocks and bonds.

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