Enhanced Economic Composite with Dynamic Weight

3 Okt

Enhanced Economic Composite with Dynamic Weight


Overview of the Indicator:

The "Enhanced Economic Composite with Dynamic Weight" is a comprehensive tool that combines multiple economic indicators, technical signals, and dynamic weighting to provide insights into market and economic health. It adjusts based on current volatility and recession risk, offering a detailed view of market conditions.

What This Indicator Does:

• Tracks Economic Health: Uses key economic and market indicators to assess overall market conditions.
  
• Dynamic Weighting: Adjusts the importance of components like stock indices, gold, and bonds based on volatility (VIX) and yield curve inversion.
  
• Technical Signals: Identifies market momentum shifts through key crossovers like the Golden Cross, Death Cross, Silver Cross, and Hospice Cross.
  
• Recession Shading: Marks known recessions for historical context.
  

Economic Factors Considered:

• TIP (Treasury Inflation-Protected Securities): Reflects inflation expectations.
  
• Gold: A safe-haven asset, increases in weight during volatility or rising momentum.
  
• US Dollar Index (DXY): Measures USD strength, fixed weight of 10%, smoothed with EMA.
  
• Commodities (DBC): Indicates global demand; weight increases with momentum or volatility.
  
• Volatility Index (VIX): Reflects market risk, inversely related to market confidence.
  
• Stock Indices (S&P 500, DJIA, NASDAQ, Russell 2000): Represent market performance, with weights reduced during high volatility or negative yield spread.
  
• Yield Spread (10Y - 2Y Treasuries): Predicts recessions; negative spread reduces stock weighting.
  
• Credit Spread (HYG - TLT): Indicates market risk through corporate vs. government bond yields.
  

How and Why Factors are Weighted:

• Stock Indices get more weight in stable markets (low VIX, positive yield spread), while safe-haven assets like gold and bonds gain weight in volatile markets or during yield curve inversions. This dynamic adjustment ensures the composite reflects current market sentiment.
  

Technical Signals:

• Golden Cross: 50 EMA crossing above 200 SMA, signaling bullish momentum.
  
• Death Cross: 50 EMA below 200 SMA, indicating bearish momentum.
  
• Silver Cross: 21 EMA crossing above 50 EMA, plotted only if below the 200-day SMA, signaling potential upside in downtrend conditions.
  
• Hospice Cross: 50 EMA crosses below 21 EMA, plotted only if 21 EMA is below 200 SMA, a leading bearish signal.
  

Recession Shading:

• Recession periods like the Great Recession, Early 2000s Recession, and COVID-19 Recession are shaded to provide historical context.
  

Benefits of Using This Indicator:

• Comprehensive Analysis: Combines economic fundamentals and technical analysis for a full market view.
  
• Dynamic Risk Adjustment: Weights shift between growth and safe-haven assets based on volatility and recession risk.
  
• Early Signals: The Silver Cross and Hospice Cross provide early warnings of potential market shifts.
  
• Recession Forecasting: Helps predict downturns through the yield curve and recession indicators.
  

Who Can Benefit:

• Traders: Identify market momentum shifts early through crossovers.
  
• Long-term Investors: Use recession warnings and dynamic adjustments to protect portfolios.
  
• Analysts: A holistic tool for analyzing both economic trends and market movements.
  

This indicator helps users navigate varying market conditions by dynamically adjusting based on economic factors and providing early technical signals for market momentum shifts.