Risk Analysis i

Volatility & Market Stress

Equity volatility reflects investor uncertainty, fear, and positioning risk. The Composite Risk Indicator aggregates volatility across time horizons and market segments:

• VIX — Core volatility of the S&P 500, capturing broad market fear
• VIX1D & VIX9D — Ultra-short-term volatility, highly sensitive to event risk and panic spikes
• VIX3M — Medium-term volatility expectations, reflecting structural uncertainty
• VVIX — Volatility of volatility, a proxy for instability in option markets
• VXN, RVX, VXD — Volatility in Nasdaq-100, Russell 2000, and Dow Jones, revealing stress rotation between growth, small caps, and industrials

Together, these components describe how nervous investors are, how fast that nervousness is changing, and whether risk is spreading across market segments.

Credit Risk & Financial Fragility

Credit markets tend to react earlier and more structurally than equities. The indicator includes multiple credit spreads to measure default risk and tightening financial conditions:

• High Yield OAS (HY) — Stress in speculative credit
• Investment Grade OAS (IG) — Risk perception in high-quality debt
• BBB OAS — Stress in the lowest investment-grade tier, often a leading signal
• HY BB OAS — Pressure in higher-quality high-yield bonds

Rising credit spreads indicate deteriorating confidence in corporate balance sheets, increasing refinancing risk, and growing systemic vulnerability.

Liquidity, Funding & Systemic Conditions

Even strong markets can fail if liquidity dries up. The Composite Risk Indicator therefore includes:

• MOVE Index — Volatility in U.S. Treasury markets, signaling stress in the risk-free backbone of the system
• SOFR Volatility — Secured Overnight Financing Rate volatility, capturing overnight funding market stress
• TED Spread — Difference between LIBOR and T-Bill rates, a classic measure of interbank lending stress
• STLFSI — St. Louis Fed Financial Stress Index, a comprehensive measure of financial system stress
• CPFF — Commercial Paper Funding Facility spread, reflecting short-term funding stress
• NFCI Risk Subindex — A broad measure of U.S. financial conditions, capturing leverage, liquidity, and funding constraints

These inputs assess whether financial plumbing is functioning smoothly or starting to clog.

Yield Curve & Recession Risk

The yield curve is one of the most reliable recession indicators. An inverted curve (short-term rates higher than long-term) has preceded every U.S. recession since the 1960s:

• 10Y-2Y Spread (Inverted) — The difference between 10-year and 2-year Treasury yields. When this goes negative, the yield curve is inverted, signaling elevated recession probability

Yield curve inversion reflects market expectations that the Fed will need to cut rates due to economic weakness. It's a forward-looking signal of systemic stress.

How to Read the Composite Risk Indicator

The indicator is best understood as a risk regime tool, not a timing oscillator.

Trading Philosophy Behind the Indicator

The Composite Risk Indicator is not meant to predict exact tops or bottoms. Instead, it provides a risk context:

• Green ? Trade trends confidently
• Yellow ? Be cautious, markets are fragile
• Red ? Capital preservation first

Markets can ignore risk for a long time — but they can never escape it.

The Composite Risk Indicator helps identify when risk is benign, when it is building, and when it dominates market behavior — allowing traders and investors to adapt before price action forces them to.