🔮"The crystal ball": early warning & crash signals

Negative news is piling up again and market sentiment cooled down a little in August:

"Brace for a crash before the golden age of AI." - Financial Times

"Is the AI bubble about to burst - and send the stock market into freefall?" - The Guardian

Some people are thinking:

"The market MUST crash soon! What do I do now? Maybe I'd better sell everything?"

If you hold highly valued individual shares such as $PLTR (-0.35%) such thoughts may quickly rob you of sleep.

(Yes, the bull in the picture has a Palantir logo on his chest and is running towards a cliff 😘)

Others remain calmly on autopilot and continue to save in their ETF portfolio and look forward to opportunities for extra purchases in the crash.

And those who follow strict rules (momentum à la @Epi ) are hardly affected by "doom & gloom" headlines anyway.

The widely known truth is, of course:

🤷‍♂️ Nobody knows what the market will do tomorrow.

👉 But: There are macro signals that in the past have frequently have often flashed before major drawdowns. Not perfectly, not always, but often enough to keep an eye on them.

I have built a TradingView indicator from them:

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Big Mo's crystal ball 🔮

The glass ball bundles several US macro indicators into a single risk oscillator (0-100), colors the line smooth from green → orange → red and marks "yield curve re-steepen warning window" discreetly in the background.

🤡 I see the indicator more as a "fun experiment" than as a serious tool.

Just take a look, duplicate the code and play around with the numerous settings (see FAQ below).

👉 Link to the indicator:
https://www.tradingview.com/script/EWH6Gvcw-Big-Mo-s-Glaskugel-Macro-Drawdown-Risk-v1-1-2/

📍What's inside? (short & crisp)

• Yield curve 10y-3m (FRED:T10Y3M)

Inversions are well known - my twist: re-steepening (the jump back above 0 after an inversion). This signal has often been the more useful harbinger of stock market stress.

• Credit Spreads (FRED:BAA10Y)

When Baa spreads shoot well above their 12-M average → Risk-On → Risk-Off transition.

• LEI (ECONOMICS:USLEI)

Weak Leading Economic Index (6-month rate) = economic headwind.

• CAPE (Shiller PE, SHILLER_PE_RATIO_MONTH)

High valuation ≠ immediate crash, but increases downside risks.

• VIX spikes (CBOE:VIX)

Sudden spikes in volatility are "boosted" in the score.

⚠️Wichtig:

This is not an oracle or a guarantee of anything.

They are warnings, not commands.

💡Nevertheless:

These are precisely the factors that have made various large declines conspicuous before (dotcom, GFC, 2020 etc.).

⁉️Was do you see on the chart?

• An oscillator (0-100)which shows the combined risk - green = relaxed, orange = be alert, red = high risk.
• Shaded zonesstart when re-stepping and end as soon as the situation is "green" again.
• A compact status panel for the current market status with traffic light labels: Risk Level, Yield Curve, Credit Stress, Economy (LEI), Valuation (CAPE).

Example:

Here I have the first "yield curve re-steepener" in the red⚡HIGH risk zones on the chart of the $SPY (+0.03%) marked.

This shows you where the indicator would have "released" you from the market with today's hindsight bias. 😏

Why not in the 2022 bear market? 🤷‍♂️

• 2022 was an interest rate/valuation bear market, not a credit panic.
• The crystal ball fires red especially when re-steepening after inversion - that came late.
• Spreads: increased, but not crisis-like. LEI turned late. VIX rarely extreme.
• Dynamic scaling relativizes 2022 compared to 2008/2020 → Score remains rather orange.

💬FAQ

What is the crystal ball good for?

To visualize macro risk in a compact form. Not a timing tool for the next 5-minute trade, but a possible early warning radar.

For which market is this optimized?

For the US market. All data sources are US macro series.

No matter which chart you load (stock, ETF, crypto): The data remains US macro. It's best to look at the SPX/SPY. If it collapses, practically everything else goes with it anyway...

I have activated the indicator on stock XY. Why wasn't the crash "predicted" there?

Because the crystal ball measures the macro perspective, not the idiosyncratic risk of an individual stock. Company news can move the stock regardless of the macro picture.

Which timeframe?

Recommendation: 1W (The underlying series come in D/M from FRED/MULTPL anyway).

Is it possible to see the measured values in the panel when hovering a point in time?

Unfortunately not. This is a limitation of Pine Script.

Which settings can I customize?

• Weights of the components (Yield, Credit, LEI, VIX, CAPE)
• Threshold values (inversion duration, re-steepen lookback, credit bps, LEI cutoff, CAPE level, VIX spikes)
• Re-Steepen-Boost (strength & half-life)
• Warning logic (all-clear bar, max. duration, "only shade if not green")
• Scaling & smoothing (EMA length, dynamic scale, yellow/red limits)
• Panel position (and optionally a snapshot time if you want to see fixed historical values)

Is THe FiNaNciAL AdVicE? 😱

No. No recommendation, no guarantee. Use it as context and combine it with your own research & risk management.