Innate characteristics of stock market
Help rather than relying solely on guesswork
First of all, many people know that the stock market is a “leading” indicator of economic prosperity. But here comes the question. After all, what indicators or data are based on science, rather than divination or astrology, are indeed helpful in predicting the direction of the U.S. stock market.
Please note: I used the word “helpful” rather than accurate prediction. This needs to be clarified first. I personally don’t believe that there is anyone or any method in the world that can accurately predict the direction of the stock market. If there is, that person must be a liar. This is what I posted in the article “Why timing the market or swing trading simply not work?” and “Investors who chase for touted stocks“
Stock market itself is full of uncertainty
I have stated repeatedly in the following three posts: the stock market itself is full of extreme uncertainty. Throughout history, no one has ever been able to accurately predict the direction of the market. Although investing is not a pure science, there are ways to succeed in stock market investing.
- “Investing has no formulas, but there are ways to invest successfully“
- “The main investment principles of successful investors are similar“
- “The uncertainty in investment“
Federal Reserve changes interest rates
The Federal Reserve will not raise or lower interest rates for no reason. When the Federal Reserve raises or lowers interest rates, it means that the economic climate “must” have undergone a major change. There is no doubt about this. For details, please see my previous posts: “Will Fed rate cut gurantee stock market rise?” and “Tax, inflation and rate are the top three serious killers to investors“
A widely accepted indicators
Dow Jones Transportation Index
The Dow Jones Transportation Average (DJTA) is one of several stock market indexes created by Charles Dow, founder of the Wall Street Journal and Dow Jones Company. It is one of the oldest U.S. stock market indexes on the market. It was first published on July 3, 1884.
The Dow Jones Transportation Index is an ancient economic indicator that has existed for more than 140 years. Historical experience has proven the value of this index. It is currently made up of 20 stocks in the Dow Jones Transportation Index — including railroad operators, airlines, package carriers and trucking companies — and poor performance could signal a weakening economy or, if they fail to rebound, could would prevent significant progress in the broader market.
The Dow Jones Transportation Indexes are “a barometer of future economic activity, and they may be signaling that while a recession is not imminent, a slowdown may be coming.”
FedEx (ticker: FDX) is the most representative component of the Dow Jones Transportation Index, which is why many Wall Street analysts must track this stock. FedEx (ticker: FDX) is the most representative component of the Dow Jones Transportation Index, which is why many Wall Street analysts must track this stock.
Buffett Indicator
The Buffett indicator calculates the ratio of the total market value of the U.S. stock market to GDP (gross domestic product) to observe whether the stock market value is supported by the real economy. If the indicator is between 75% and 90%, it is a reasonable range, and if it exceeds 120%, it means that the stock market is overvalued.
I have analyzed this part in detail in my post “Powerful and persuasive Buffett indicator, whether market is overheat” and I will not repeat all the content here.
Stock market overheating indicator
Shiller Indicator
The Cyclically Adjusted Price-to-Earnings Ratio (CAPE), also known as the cyclically adjusted earnings ratio, was proposed by Nobel Prize winner in Economics Robert Shiller in 1998. It is calculated by dividing the actual stock price, adjusted for inflation, by the average of the company’s inflation-adjusted earnings per share over the past 10 years.
The main purpose of the Shiller P/E ratio is to provide a market valuation indicator after adjusting for economic cycle fluctuations. It measures a market’s valuation level by comparing market prices to the average real earnings over the past decade. Compared with the traditional P/E ratio, the Shiller P/E ratio can better reflect the long-term trend of the market and reduce the impact of short-term fluctuations on the evaluation results.
Irrational Exuberance Index
The irrational exuberance index proposed by Alan Greenspan in 1996. For details, please see my post of “Irrational Exuberance Indicator“
Useful economic indicators
North American semiconductor b/b value
Semiconductors are modern oil. Observing the production and shipments of semiconductors can also effectively detect the global economic boom. B/B value (Book to bill ratio) is the ratio of the total amount of “future orders received” and “actual shipments” of semiconductor equipment manufacturers in North America. Book represents the total amount of orders received by the manufacturer, and Bill represents the amount of shipments by the manufacturer. It is the distribution center for semiconductor equipment manufacturers in North America, so this indicator is regarded as an important basis for observing the rise and fall of the global semiconductor industry.
The Philadelphia Semiconductor Index (ticker: SOXX) is the index most directly related to this indicator. Regarding the Philadelphia Semiconductor Index, investors can refer to my post “Philadelphia Semiconductor Index Annualized Return Query over the Years”
Commodity Copper Prices
First, in terms of commodity prices, reports pointed out that copper prices have dropped by 20% from the high in 2023, zinc prices have dropped by 30%, and aluminum prices have dropped by 20%, all showing significant declines. Copper, in particular, is widely used in infrastructure, automobiles, home appliances, etc., and is regarded as a leading indicator of the economy. The decline in copper prices also reflects the market’s sense of economic stagnation in mainland China, which accounts for 60% of global copper demand.
to worry.
Lipstick index
The lipstick index was proposed by Leonardo Lauder, the former president of the Estee Lauder Group. He analyzed Estee Lauder’s actual revenue figures and found that lipstick sales bucked the trend during the economic recession. As a “cheap and unnecessary item”, lipstick can play a “comforting” role for consumers. In an economic downturn, people will still have a strong desire to consume, so they will turn to cheaper purchases. Products of. During the COVID-19 pandemic, demand for cosmetics dropped as there was little need to put on makeup to go out, and lipstick sales suffered the biggest blow, causing the lipstick index to die out.
Of course, Estee Lauder (ticker: EL) and Liya (ticker: LRLCY) are both representative stocks of the lipstick index.
Cardboard box price
In 2022, the Cardboard Box price shows that the United States is about to fall into recession, as evidenced by cardboard boxes, because low waste paper prices hide hidden economic worries. The main theoretical basis is that the demand for cardboard is closely related to the sales of goods and other economic activities. In particular, part of modern people’s shopping occurs on e-commerce platforms. All e-commerce shipments must rely on cardboard boxes. The market demand for cardboard boxes can indeed Reveals consumer demand for goods.
Of course, International Paper (ticker: IP ) is the stock that best represents global paper products.
Used car price index
The used car price industry index is generally used as a leading indicator of inflation because consumers tend to purchase second-hand cars when considering their wallets during periods of rising prices, rather than buying new cars during boom times. Retail prices of used cars in the United States usually follow wholesale prices. The Manheim Used Car Value Index reflects the wholesale price paid by dealers for subsequent retail sales of used cars and is the primary indicator for tracking used car price trends.
Economic and recession
Sahm Rule
With 11 recessions occurring since 1950, Sahm Rule backtest is 100% accurate and is a reportable recession indicator.
But the inventor of Sam’s rule reminded that this rule has prerequisites, and she personally has repeatedly denied its accuracy in predicting the future.
For the detail, please see my post of “Sahm Rule, a 100% accurate recession indicator”
Jobless claims
Through weekly statistics on the number of registered unemployment benefits, we can truly reflect and track the weekly unemployed population. In contrast, the employment population is not a good indicator of business cycle. Since the employment rate usually lags behind changes in the business environment, the employment rate indicator does not give us enough information.
Leading indicators
New manufacturing orders
Although the proportion of manufacturing in U.S. GDP is currently declining, households and companies will not be able to place large orders if they have poor economic expectations. Therefore, the volume of manufacturing orders is mainly calculated and published by the US Supply Management organization. This index can also clearly illustrate the current buying sentiment in the United States.
Auto sales
New car sales are a good indicator of prosperity. In contrast, some people are bound to ask why new home sales are not included? Because the stability of this indicator is not high, monthly corrections are often required; in addition, because it requires a large number of corrections, its release time is much slower than other indicators.
Related articles
- “Sahm Rule, a 100% accurate recession indicator, was triggered“
- “Irrational Exuberance Indicator“
- “Powerful and persuasive Buffett indicator, whether market is overheat“
- “Querier to Annualized rate of return for Philadelphia Semiconductor Index (SOX)“
- “Investing has no formulas, but there are ways to invest successfully“
- “How big a factor does luck play in investment success?“
- “The main investment principles of successful investors are similar“
- “Invest success depends on less chance of making mistakes“
- “Mistakes of omission and mistakes of commission“
- “The uncertainty in investment“
- “Why timing the market or swing trading simply not work?“
- “Investors who chase for touted stocks“
- “Investors should not trust forecasts“
- “Should investors care about currency exchange risk when investing in US stocks?“
- “The impact of the Inflation Reduction Act on US stocks“
- “Will Fed rate cut gurantee stock market rise?“
- “Tax, inflation and rate are the top three serious killers to investors“
- “How investors should look at economic trends and forecasts?“
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