Equity Risk Indicator - BCA-Style ProxyEquity Risk Indicator – Multi-Factor Composite (ERI Proxy)
Overview
The Equity Risk Indicator (ERI) is a standardized, equally-weighted composite that measures how stretched the US equity market is across four independent dimensions: price momentum, investor sentiment, speculative futures positioning, and deviation from the long-term trend. The concept is inspired by institutional risk aggregation frameworks: instead of relying on a single overbought/oversold metric, several uncorrelated risk factors are normalized via z-scores and combined into one oscillator.
Readings above +1 standard deviation have historically clustered near major market tops (2000, 2007, 2018, 2021), while readings below −1 have coincided with washed-out, contrarian buying zones. The indicator is designed as a regime and risk-management tool, not as a standalone entry signal.
Methodology
Each component is transformed into a rolling z-score (default lookback: 500 bars), then all active components are equally weighted, and the resulting composite is re-standardized and smoothed with an EMA. This double standardization keeps the output stable around a zero mean with interpretable ±1 / ±2 SD bands.
1. Composite Momentum Equally-weighted z-scores of the 3-month, 6-month, and 12-month rate of change. Captures how extended price momentum is relative to its own history across multiple horizons.
2. Sentiment (inverted) Z-scores of the volatility index (default: TVC:VIX) and the put/call ratio (default: USI:PCA), both inverted. Low implied volatility combined with low put demand signals complacency — historically a late-cycle risk condition.
3. Futures Positioning (COT) Noncommercial net long positions (Legacy report, Long minus Short) for E-mini S&P 500 futures, retrieved via the official PulseWire/LibraryCOT. Elevated speculative net-long positioning indicates crowding. CFTC contract code is configurable (default: 13874A). Note: COT data is weekly, so this component updates in steps on daily charts.
4. Trend Deviation (earnings-expectations proxy) Deviation of the log price from its long-term linear regression (default: ~3 years). When price trades far above its structural trend, aggressive growth expectations are priced in — serving as a proxy for forward earnings optimism, which is not directly available as a data feed.
Each component can be toggled on/off individually. When a data source fails to load, the composite automatically re-weights across the remaining components.
How to Read It
Above +1 SD (red zone): Elevated risk. Momentum, sentiment, positioning, and/or trend extension are stretched simultaneously. Historically associated with topping conditions — consider tightening risk, reducing leverage, or hedging.
Rollover below +1 SD (circle markers): The indicator crossing back under +1 after an overheated reading has historically appeared near cycle peaks. This is the pattern highlighted by the circle markers at the top of the pane.
Around 0 (mean): Neutral regime.
Below −1 SD (green zone): Depressed risk conditions — panic sentiment, washed-out momentum, light positioning. Historically a contrarian accumulation zone.
The data window additionally displays all four component z-scores separately, so you can see at any bar which factor is driving the composite.
Settings
Components: Toggle Momentum, Sentiment, COT Positioning, and Trend Deviation independently
Symbols: Volatility index, put/call ratio, and CFTC contract code are fully configurable
Z-Score Lookback: Standardization window (default 500 bars ≈ 2 years; increase to 750–1000 for a smoother, slower profile)
Trend Lookback: Regression window for the trend-deviation component (default 756 bars ≈ 3 years)
Smoothing: EMA applied to the final composite (default 10)
Alerts
ERI crosses above +1 SD (higher-risk regime)
ERI rolls over below +1 SD (potential peak signal)
ERI crosses below −1 SD (lower-risk / contrarian zone)
Recommended Use
Designed for the daily timeframe on broad US equity indices (SPX, ES1!, SPY). It works best as a macro overlay: as a filter for trend-following systems, as a position-sizing input, or as a hedging trigger. Because all components are standardized, the framework also transfers to other liquid indices — adjust the CFTC code and sentiment symbols accordingly.
Limitations
Earnings revisions and forward EPS growth are not available as PulseWire data feeds; the trend-deviation component serves as a structural proxy for these inputs. COT data is published weekly with a lag. As with any standardized oscillator, extreme readings can persist longer than expected — this tool measures risk conditions, it does not time reversals on its own.
This indicator is for informational and educational purposes only and does not constitute financial advice.
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