- INVESTMENT CASE STUDIES –

8. MARKET INDICATORS

TABLE 1 STOCK MARKET INDICATORS

CATEGORYINTERPRETATION/INTERNET ADDRESS

Commodity, CRB Index / The Commodity Research Bureau’s (CRB) Index of 22 basic commodities is among the first to be influenced by changes in economic conditions. A higher index indicates higher commodity prices and is a Bearish signal. A falling index indicates lower prices and is Bullish.

Commodity, London Gold / When the price of gold increases it indicates a weaker currency and is a Bearish signal. A decreasing gold price is a Bullish signal.

Commodity, Sweet Crude Price / A rising oil price signals increased costs and decreasing profits so it is a Bearish signal. A falling oil price is considered Bullish.

Consumer, Confidence and sentiment (CCI) / Consumer Confidence and Sentiment is the number 7 indicator in its market impact.

Consumer, Credit Index (CC) / This indicator is computed by the Fed and is published monthly. It tracks credit card debt and installment loans. A change > 1% or <0.25% is considered Bearish while a change between 0.25 and 1% is considered Bullish.

Consumer, Personal Income (PI) / This is number 8 in its impact on the market. Consumer Personal Income includes wages and salaries, interest and dividends, proprietors and rental income and transfer payments. Increasing income is Bullish; decreasing is Bearish.

Consumer, Retail Sales (RS) / This is number 6 in its overall impact. A positive change in Retail Sales is Bullish; a negative change is Bearish.

Financial, Advance/Decline Ratio / The Advance/Decline Ratio is that of the NYSE Advancing to Declining issues. A rising ratio is Bullish; falling is Bearish.

Financial, Officer Loan Survey / The Federal System issues a report on Senior Loan Officers opinion on bank lending practices. One result is the percentage of banks tightening commercial and industrial bank loan requirements. Tightening greater than 0.0 is Bearish. Less than 0.0% is Bullish.

Financial, P/E Ratio / An increasing ratio between 15 and 30 is considered Bullish. A ratio > 30 or declining is considered Bearish.

Financial, S&P 500 Index / A positive change in the S&P 500 Index is Bullish; negative is Bearish.

Financial, US Treasury yields / Rising US Treasury yields are considered negative for the market. Declining yields are Bullish. Buy stocks after the second (confirming) decline in the Federal Funds Rate.

Financial, Volatility index (VIX) / The VIX is the Implied Volatility of the S&P 100 Index Option Bid/Ask quotes whose average time to expiration is 30_DAYS. An increasing index is Bullish; decreasing is Bearish.

Gross Domestic Product (GDP) / Changes in the GDP is number 10 in its impact on the market. The GDP is the quarterly change in all goods and services produced adjusted for inflation. The long term average change is 3.5%. A Rate of Change above 3.5% is considered Bullish and less than 3.5% is Bearish.

The GDP is so important that it is distributed while it is being generated instead of being distributed after completion. It is available as the Atlanta Fed NowCast Report:
or

Growth, Non-manufacturing ISM (ISM) / This indicator is ranked as number 2 in its impact. The Institute of Supply Management’s (ISM) survey of non-manufacturing activity is Bullish when >50 and Bearish when <0. Two reports are issued. One is for manufacturing industries and the second for Non-manufacturing. The manufacturing index is broken down into these components with each analyzed for Direction, Rate-of-Change and Duration of Change. The following components are considered:
  1. PMI
  2. New Orders
  3. Production
  4. Employment
  5. Supplier Deliveries
  6. Inventories
  7. Customer’s Inventories
  8. Prices
  9. Backlog of Orders
  10. New Export Orders Imports
The commentary lists the “hot” (growing) industries.
Non-Manufacturing:
Manufacturing:

Growth, Productivity / The Labor Department’s Index of Output divided by Hours Worked for the non-farm business sector comprises 75% of the GDP. Increasing productivity is Bullish; decreasing is Bearish.

Inflation, Consumer Price Index (CPI) / This is number 4 in its overall impact. A rising change in the Consumer Price Index over 0.4% is inflationary and considered Bearish. A change between 0.0 and 0.4 is normal for sustained growth and is Bullish. A decreasing change is considered deflationary and is Bearish.
Inflation, Producer Price Index (PPI) / This is number 5 in its impact. A change in the Producer Price index > 1 is considered inflationary and Bearish. A change between 0.0 and 1.0% is normal for growth and is considered Bullish. A negative chang4e is considered deflationary and Bearish.

Investment, Housing Market Index (HMI) / The Housing Market Index is provided by the National Association of Home Builders and tracks single-family housing sales< Prospective sales and prospective buyer traffic. An increasing index is Bullish; decreasing Bearish.

Labor, Employment Situation / The number 1 indicator is the Employment Situation Report issued by the Bureau of Labor Statistics issued at 8:30 AM on the first Friday of each month for the preceding month. As the number of people holding jobs and the workweek expands, people begin to spend more money and business sales and profits increase. The only exception to this is if the economy is overheating causing borrowing costs to increase. Stagnant growth is bad for stocks.

Labor, Initial Jobless Claims / Weekly claims for Unemployment Insurance is number 3 in its impact. The labor Department reports on Initial Unemployment Insurance Claims. Increasing claims are considered Bearish; decreasing Bullish.

Labor, Unemployment Rate (UR) / Increasing unemployment is Bearish; decreasing Bullish. The core unemployment rate is 4.6%. When unemployment falls below this value, competition for new employees becomes an inflationary force.

Manufacturing, Capacity Utilization (CU) / Capacity Utilization (CU)is the ratio of current industrial production to that the manufacturing sector can produce within a reasonable work schedule. A rising CU is Bullish; falling is Bearish. When CU>84%, this is a signal that new investment is taking place and that is inflationary.

Manufacturing, Durable Goods Orders / The Advance Report on Durable Goods is number 9 in its impact on the market. Durable Goods Orders are orders for goods expected to last three years or more. Increasing orders are Bullish; decreasing Bearish.

Manufacturing, Industrial Production / Industrial Production is the weighted SUM of Indexes of Production in 276 industries. Increasing values are Bullish; decreasing Bearish.

Manufacturing, Industrial Production (IP) / This is the weighted sum of Production Indexes of 276 industries. A rising value is Bullish; falling Bearish.

Manufacturing, Chicago Fed National Activity Index (CFNAI) / The Chicago branch of the Federal Reserve System publishes the CFNAI Index of business activity in the Chicago area. The purpose of this report is to advise on the economies outlook and likelihood of inflation. Use the filtered version of their report, the CFNAI-MA3.
<-1.5<-0.7 The economy is probably in a recession.
<-0.7 The chances of a recession has risen substantially.
>0.2 The recession is likely over.
>0.7 If >0.7 for two years into an economic expansion, indicates that inflation is accelerating
>1.0 If economy is into an expansion, indicates overheating.

Money, Money to Zero Maturity (MZM) / Money to Zero Maturity is an index ma9ntained by the Federal Reserve Bank of St. Louis and is a measure of the money stock which includes the currency in circulation, demand and other checkable deposits, and institutional money funds. The money stock that is neutral or rising under 10% is Bullish. A money stock rising faster than 10% or is falling is considered Bearish.

Trade, Dollar-Cash / The Dollar Cash Index is a geometrically weighted average of the Cash Exchange Rate between the dollar and a basket of six major currencies. An increasing index is Bullish; decreasing is Bearish.

TABLE 2: BOND MARKET INDICATORS

CATEGORYINTERPRETATION/INTERNET ADDRESS

Consumer, Personal Income (PI) / Personal Income and Spending are number 8 in its impact on the Bond Market. Consumer Personal Income includes wages and salaries, interest and dividends, proprietors and rental income and transfer payments.
A listless PI is preferred by fixed income investors and tends to move higher bond prices and lower interest rates. Any hint of increasing PI is a strong negative for the Bond Market.

Consumer, Retail Sales (RS) / Retail Sales is number 6 in its overall impact on the Bond Market. High Retail Sales are negative for Bonds because it signals strong growth which is likely to lower Bond prices and increase yields.

Gross Domestic Product (GDP) / Changes in the GDP is number 10 in its impact on the bond market. The GDP is the quarterly change in all goods and services produced adjusted for inflation. The long term average change is 3.5%. A Rate of Change above 3.5% is considered Bearish and less than 3.5% is Bullish. The fear is that the Fed will react to a growing economy by raising interest rates.

Growth, Manufacturing Survey (ISM) / This indicator is ranked as number 3 in its impact on the Bond market and is one to carefully monitor. Long-term bond yields have a 70% correlation with the ISM Manufacturing Index. The Institute of Supply Management’s (ISM) survey of non-manufacturing activity is Bearish when 50. An index of 45 to 50 does not have a strong impact on the Bond Market. A reading below 45 can energize the Bond Market because it is interpreted as a serious weakness in the Bond Market.

Inflation, Consumer Price Index (CPI) / This is number 2 in its overall impact on the Bond Market. A sudden jump in the CPI can cause a drop in Bond prices and cause a sharp increase in interest rates. A benign CPI is Bullish for Bond Prices and causes interest rates to drop.
Inflation, Producer Price Index PPI / This is number 4 in its impact on the Bond Market. An upward jump in the PPI is interpreted as leading a jump in the CPI signaling a possible inflation. Any hint of inflation is negative for bonds.

Investment, Housing Market Index (HMI) / This is Number 7 in its impact on Bonds. The Housing Market Index is provided by the National Association of Home Builders and tracks single-family housing sales, prospective sales and prospective buyer traffic. An increasing index is Bullish; decreasing Bearish. Bond traders prefer weak ore falling HMI.

Labor, Employment Situation (ES) / The number 1 Bond Indicator is the Employment Situation Report issued by the Bureau of Labor Statistics and issued at 8:30 AM on the first Friday of each month for the preceding month. As the number of people holding jobs and the workweek expands, people begin to spend more money and business sales and profits increase. The only exception to this is if the economy is overheating causing borrowing costs to increase. Stagnant growth is bad for stocks. Bondholders react to any hint of inflation and rising interest rates which cause falling bond prices. All of this is particularly true when the economy is operating near full employment. Weak employment reports is Bullish for bond prices.

Labor, Initial jobless Claims IC) / Weekly claims for Unemployment Insurance is number 5 in its impact on the Bond Market. Increasing claims are considered Bullish; decreasing Bearish because it hints at a sturdier economy.

Manufacturing, Capacity Utilization (CU) / This is number 9 in its impact on the Bond Market. Capacity Utilization (CU)is the ratio of current industrial production to that the manufacturing sector can produce within a reasonable work schedule. A rising CU is Bearish; falling is Bullish. When CU>84%, this is a signal that new investment is taking place and that is inflationary.

Financial, Federal Funds Rate (FFR) / Buy Bonds after the second (confirming) rise in the Federal Funds Rate.

REFERENCES:

  1. is the source of the indicator interpretations.
  2. Baumohl, Bernard, “The Secrets of Economic Indicators,” Third Edition 2013, FT Press

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