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Wouldn’t it be great to know where the markets are going before they actually get there? Having that knowledge (sort of like having a crystal ball into the future) would help you plan your trades wisely. Well, I don’t have a crystal ball into the markets or any psychic intuition I could share with you. But I do know about some key market indicators that many professional traders and analysts use to help predict where the markets might be headed. Adding just a few of these to your watch list could put you well ahead of the average investor and maybe even fatten your portfolio with bigger profits and winners.
Market analysts love their numbers. You’ve probably heard them on the various business news shows talking about the latest index or indicator report that just came out. Some analysts get pretty excited when doing these reports and you might be wondering what all the fuss is about. After all, it sounds like it’s just a bunch of numbers and statistics, right?
Well, these numbers oftentimes reflect what’s going on in the underlying economy and can give you a clue as to where the markets might be headed.
Research firms and government agencies release hundreds of economic reports each month. Some indicators and reports can seem convoluted and might leave you scratching your head as to what they really mean. But there are a few I’ve listed below that are my favorites to watch and have helped me gain a better understanding of market fluctuations.
While this list is by no means complete or representative of the “best” market indicators (if there is such a thing), it should give you a head start into building your own list of favorites to watch.
Each month the U.S. Department of Labor releases a range of statistics. Among these are the unemployment rate and the new claims for unemployment insurance.
Both of these reports are fairly self-explanatory and it’s easy to see how the markets could react either positively or negatively depending on the numbers. If the unemployment rate begins to creep up and more people are filing for unemployment benefits, this could mean the economy is weakening, something investors would see as a bearish sign.
Another number to watch is the labor force participation rate. This statistic is particularly interesting because it tells you the percentage of people 16 years of age or older who are either employed or actively looking for work.
When the economy is on the downturn, people have difficulty finding jobs. They may get so discouraged they stop looking for work and drop out of the labor force entirely. This could cause the labor force participation rate to drop precipitously, which is what happened after the 2008 financial meltdown.
The CCI is produced by The Conference Board, an independent business research organization. It measures U.S. consumer confidence in the economy. It reflects consumers’ current opinions about the economy and whether they believe economic conditions will get better or worse over the next six months.
The financial markets look at the month-to-month and year-to-year changes in the CCI. If the CCI is on the upswing over several months, this means consumer confidence is rising. Consumers are more likely to increase their spending, which should then increase company profits. The markets look to a rising CCI as an indicator that the economy is humming along, a bullish signal.
Conversely, a falling CCI might mean less consumer spending and the potential for a decrease in company profits, a sign that the markets might be on the decline.
Another index that can sway the markets up or down is the Consumer Price Index (CPI). The CPI measures price changes over time of selected consumer goods and services purchased by U.S. households. A change in prices, of course, can be used to measure inflation.
Investors fear inflation because it reduces people’s ability to buy products and services and it erodes the value of savings.
High inflation can certainly have a downward pull on the stock markets, while low inflation is seen as a positive for the markets and investors. This is why price indexes, such as the CPI, are good indicators to keep an eye on.
The Institute for Supply Management (ISM) conducts a survey of purchasing managers. These are the people responsible for buying the parts and materials manufacturing companies need to produce goods. The report is seen as an indicator of manufacturing upturns and downturns that could affect company earnings and the overall stock market.
When the economy is doing well, manufacturing orders go up and this means purchasing managers need to increase their orders of raw materials and parts to meet the increased production demand. Conversely, when the economy is doing poorly, purchasing managers stop placing orders because demand for their company’s goods has decreased.
Market analysts eagerly anticipate the ISM Manufacturing Survey as it gives them important data about the business cycle. The report is seen as a harbinger of what company profits might be like in the future and if the overall stock market will be going up or down.
Does that lyric sound familiar to you? It’s from the Kenny Rogers’ song, “The Gambler.” Of course, investing shouldn’t be a gamble to you. Instead, it should be a well-thought-out strategy where you take potential risks and rewards into consideration before taking a position in the markets.
And that’s where these key market indicators we’ve been discussing might help you. Knowing just a little bit about where the markets might be headed before they actually get there can give you the insight to play your hand just right.
Understanding and keeping watch of common, key market indicators could boost your odds you don’t get caught off guard by an unexpected market fluctuation. You’ll be better prepared to buy when the odds are in your favor, hang on to keep your profits growing, and make an exit when it’s time to take your chips off the table.
Or, as the song says… “you’ll know when to hold ‘em, when to fold ‘em, when to walk away, and when to run.”
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.