How crazy is the market?

Introducing the Crosby Irrationality Index

Jan 3, 2014 @ 12:01 am

By Daniel Crosby

It's a question we've all asked in light of the eye-popping gains realized in 2013. And while there is no shortage of economic indicators (the Fed releases over 4,000 each month), it can be hard to synthesize these into a meaningful and concise measure. It is toward just such an end that we have developed the Crosby Irrationality Index, a 0-to-100 measure of market fear and greed.

The Crosby Irrationality Index combines a number of fundamental and technical indicators indicative of market psychology and weights them relative to their historical predictive power. As a result, we also are able to report implied returns for one-month, one-year and three-year periods based on the current level of market fervor. These implied returns should be understood less as specific return predictions and more as evidence of economic head or tail winds.

The implied returns are indicative of what we might expect given the current level of market irrationality, all other things being equal, which, of course, they never are. For example, the current implied returns for three years from now are -6.817. While I'd never bet that the realized returns would be exactly -6.8 for that time period, the strength of the negative prediction does give me pause when considering how best to invest.

But enough already, you're here for the index score, which is as follows:

The Five Strata of the Crosby Irrationality Index

Revulsion — 0 to 19 CII

Watchfulness — 20 to 39 CII

Equilibrium — 40 to 59 CII

Optimism — 60 to 79 CII

Mania — 80 to 100 CII

The Current CII Score is 75.8 (optimism approaching mania).

Implied Returns

One month — -0.1061

One year — -2.598

Three years — -6.817

Many financial professionals have expressed to me a belief that market valuations are at a level approaching mania and our quantitative analysis bears that out. These scores are as of the end of 2013 and we will provide new data each month, so please stay tuned. If you have questions regarding the CII or would like the index delivered via the South Gotham Times monthly newsletter, I can be reached on Twitter @incblot or via email at Daniel@incblot.org.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Behind the scenes at Pershing Insite 2018

What goes on behind the scenes at one of the industry's biggest conferences? Join us for an all-access sneak peak!

Latest news & opinion

Merrill Lynch fined $42 million for misleading customers

In addition to the practice of 'masking' trades, the wirehouse went to extremes to cover up the wrongdoing.

Advisers with billions in AUM leaving Wall Street

Merrill Lynch has seen two teams exit recently, each with more than $4 billion in client assets.

Wells Fargo weighs changes to wealth unit

The move would reflect the bank's effort to cut $4 billion in costs.

Small broker-dealers seek legislative relief from annual audits

Bills introduced in House, Senate would remove PCAOB requirement.

Meet our new 40 Under 40s

For a fifth year, InvestmentNews is proud to shine a spotlight on the amazing accomplishments and potential of top young financial professionals.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print