METHODOLOGY
How our bubble indicator works
The indicator is a structured argument, not a forecast. It asks whether expensive prices, leverage and confident risk-taking are appearing together—and makes every judgment visible.
From six readings to one score
Each signal is clamped to a 0–100 pressure score using a fixed range: CAPE 18–42, market value to GDP 80–240%, margin-debt growth −10–40%, household equity allocation 25–50%, credit spreads 4.5–1.5% and VIX 30–10. The last two run in reverse because lower readings imply more complacency. We multiply those scores by their weights and add them. The composite becomes NO below 30, NOT YET at 30, MAYBE at 45, PROBABLY at 60 and YES at 75.
First priority: valuation · 45%
Valuation gets the largest share because detachment from economic fundamentals is the defining ingredient of a bubble. Shiller CAPE receives 25% and market value to GDP 20%. CAPE compares prices with smoothed earning power; market value to GDP compares the whole market with the economy supporting it. Using both keeps one valuation lens from deciding the verdict alone.
Second priority: leverage · 25%
Margin debt receives 25%, equal to the largest single valuation signal. Borrowing does more than accompany optimism: it can amplify demand on the way up and force selling when collateral falls. We score its year-over-year growth rather than its dollar level, because the level naturally rises as markets and the economy grow.
Confirmation signals · 30%
The remaining signals test whether the enthusiasm is broad. Credit spreads receive 12% because lenders provide an independent market price for risk. Household equity allocation receives 10% because crowded ownership leaves less uncommitted buying power. The VIX receives 8%, the smallest weight, because short-term calm can be useful confirmation but is noisy and can reverse quickly.
Why the weights are not probabilities
The weights express priority, not the chance of a crash: 25% does not mean a signal predicts one quarter of market outcomes. Slow-moving fundamentals and leverage carry 70% so a fleeting mood cannot dominate the result. A separate confidence measure checks how closely the six signals agree and how far the composite sits from the next decision boundary. Read the score as a transparent temperature check, never as a market-timing rule.