Market-Moving Indicators

Every week, dozens of economic surveys and government numbers are released and reported on in the business news. Some are “lagging indicators” that confirm or refute what we thought we knew.

Others are “leading indicators” that can be read as signals of trends to come. In any case, they move the markets, some more than others.

What are Market Indicators?

Market indicators are quantitative in nature and seek to interpret stock or financial index data in an attempt to forecast market moves. Market indicators are a subset of technical indicators and are typically comprised of formulas and ratios. They aid investors’ investment/trading decisions.

KEY TAKEAWAYS

  • Market indicators are quantitative in nature and seek to interpret stock or financial index data in an attempt to forecast market moves.
  • Market indicators are a subset of technical indicators and are typically comprised of formulas and ratios.
  • Popular market indicators include Market Breadth, Market Sentiment, Advance-Decline, and Moving Averages.

Understanding Market Indicators

Market indicators are similar to technical indicators in that both apply a statistical formula to a series of data points to draw a conclusion. The difference is that market indicators use data points from multiple securities rather than just single security.

Oftentimes, market indicators are plotted on a separate chart rather than appearing above or below an index price chart.

Most stock market indicators are created by analyzing the number of companies that have reached new highs relative to the number that created new lows, known as market breadth since it shows where the overall trend is headed.

The two most common types of market indicators are:

  • Market Breadth indicators compare the number of stocks moving in the same direction as a larger trend. For example, the Advance-Decline Line looks at the number of advancing stocks versus the number of declining stocks.
  • Market Sentiment indicators compare price and volume to determine whether investors are bullish or bearish on the overall market. For example, the Put-Call Ratio looks at the number of put options versus call options during a given period.

Popular Market Indicators

There are hundreds of different market indicators covering various indexes in the United States and around the world, including the NYSE, NASDAQ, AMEX, TSX, TSX-V, and various options exchanges.

Some of the most popular market indicators include:

  • Advance-Decline Issues – The ratio of advancing to declining securities at any given point in time. Since the indexes are weighted by market capitalization, this is helpful in determining true sentiment rather than just looking at the performance of the largest companies in a given index. Examples: $NYAD and $NAAD.
  • New Highs-New Lows – The ratio of new highs to new lows at any given point in time. When there are many new highs, it’s a sign that the market may be getting frothy, while many new lows suggest that a market may be bottoming out.
  • McClellan Oscillator – This oscillator uses a moving average of highs and lows to help smooth out the market breadth and make it easier to interpret rather than looking at choppy charts showing the raw numbers. It ranges from +150 to -150.
  • Moving Averages – Many market indicators look at the percentage of stocks above or below key moving averages, such as the 50- and 200-day moving averages. Examples: $NYA50, $NYA200, $NAA50, and $NAA200.

The following are the four big categories of economic indicators, and what they can tell you.

Employment

Employment is perhaps the most important indicator of the health of the economy. On the first Friday of each month, the U.S. Bureau of Labor Statistics releases two closely watched reports.

These are tracked from month to month, and it’s important to know whether the numbers are going up, down, or sideways.

  • The unemployment rate tracks the number of workers who are currently out of jobs.
  • The nonfarm payrolls report tracks the number of jobs that have been added or eliminated in the economy overall.

These monthly reports can cause some of the biggest one-day movements in both the bond market and the stock market.

Inflation

The mandate of the Federal Reserve is to promote economic growth and price stability the economy. Price stability is measured as the rate of change in inflation, so market participants eagerly monitor monthly inflation reports to determine the future course of the Federal Reserve’s monetary policy.

There are many indicators of inflation, but perhaps the most closely watched is the Consumer Price Index (CPI). The CPI measures the change in the prices of ordinary goods that most people spend money on, such as clothing and medical services.

There are important variations such as Core CPI, which excludes energy and food spending because their costs are so volatile they can skew the whole index.

Producer Prices

Another important measure is the Producer Price Index (PPI). This focuses on the costs related to manufacturing goods, as increases in those costs will inevitably be passed along to the consumer.

Like the CPI, the PPI is often presented as a “core” number that omits those volatile energy costs.

Market participants also keep track of the price of important commodities such as oil. Since oil is such a vital component of economic activity around the globe, its price is worth paying special attention to.

Oil Prices

Higher oil prices can lead to higher prices for a wide variety of products because oil is an ingredient in many materials and products. It also increases the cost of transporting goods waiting to be sold and the cost at which they will sell.

Deflation is seen as a negative factor just as much as inflation is. Prices drop because demand falls off. Corporate profits fall as prices fall. Production is cut and workers are laid off. And so on.

Consumer Activity

Consumers make up nearly 70% of all U.S. economic activity. Thus, their spending patterns and even their levels of optimism about their economic well-being are important to track.

When people are insecure about their jobs, consumer confidence drops. Fewer people make large purchases. Corporate profits drop. And that’s one more related number to watch:

  • The Consumer Confidence Index is released on the last Tuesday of each month. It indicates how optimistic people are about their own economic prospects and, therefore, how willing they are to spend money

The Consumer Confidence Index is considered one of those “leading” indicators. The degree of confidence in their own economic well-being that consumers have makes them willing or unwilling to consider buying a new car or going on a vacation.

Retail Spending

Changes in the actual spending activity of consumers, on the other hand, are lagging indicators, but they still have a direct impact on corporate profits and the level of stock prices.

One of the most important indicators here is the retail sales report, published monthly by the U.S. Census Bureau based on a survey of 4,900 businesses.

The Housing Market

The housing market is also a vital economic indicator. Housing is a highly localized business and is difficult to measure on a national basis.

Nonetheless, market participants pay attention to monthly releases on housing starts, building permits, and new home sales in order to get a reading on the level of activity in the housing market.

Market watchers also monitor housing price changes through a variety of indicators such as the S&P/Case-Shiller Home Price Index, which monitors home price changes in 20 American cities.

By synthesizing a variety of housing reports, market participants can deduce whether or not people are willing to commit to buying a new home or, for that matter, any large purchase.

Investor Activity

The best time to invest in stocks is not when everyone is bullish, but when almost everyone is bearish. Buy when stocks are cheap. Hold until they go up.

Therefore, readings of investor sentiment are important. A variety of indicators are published by large investment firms and research firms, which periodically poll their clients to determine market consensus.

As overseas investors have become increasingly important participants in the U.S. financial markets, measures of their activity have garnered more attention. One of the most closely watched reports focuses on the purchase of U.S. Treasuries by foreign central banks.

When central banks are buying more Treasuries, interest rates often head lower, and when rates are lower, stock prices tend to move higher.

Other important market indicators include the ratio of advances to declines and the number of new price highs and lows in the market. These readings indicate how healthy the overall stock market is and can provide confirmation as to the quality of a stock market’s advance or decline.

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