Investing for beginners is often a difficult and confusing task. Being able to take control of your own financial destiny is a primary motivator for many novice stock investors and traders. Understating a wide variety of stock market basics is an important step in the development process of the novice share trader or investor.
Being able to gauge the sentiment of ‘major’ stock market participants and developing your own take on the outlook for the economy are essential skills for long term success in the financial markets.
Understanding the different types of economic data is critical in drawing your own, ‘untainted’ views of domestic and global economic activity.
The term economic indicators cover a broad range of information that relates to the performance of the economy. The data can be published by official agencies or private sector organisations.
Economic indicators can be grouped into three broad categories:
‘Partial’ Indicators (also known as ‘Lagging Indicators’) provide information on specific types of economic activity (e.g. retail trade, employment). Partial indicators are referred to as lagging indicators because they are a measure of past conditions in the economy.
Broad Indicators provide an overview of aggregate economic activity (e.g. national accounts, financial accounts and the balance of payments). These indicators are also referred to as ‘Coincident Indicators’ because rather than predicting future trends, these types of indicators tend to change at a similar time as the economy.
‘Forward-looking or Leading’ Indicators attempt to provide some guidance to future economic developments (e.g. surveying expectations for investment, employment, manufacturing, etc). Leading indicators are important because they provide an insight into the likely trend developing in the economy, however, they can sometimes prove unreliable because they are based on business or consumer expectations which can rapidly.
From Theory to Reality…..
The recent release of a wide variety of economic data has painted a worrying sign for the world’s largest economy and it has again raised concerns over the possibility of a ‘double-dip’ recession in the United States.
Lagging Indicators – The jobless rate remains stubbornly high at 9.5 percent, and the number of unemployed remains at 14.6 million. Since April the unemployment rate has declined from 9.9 percent but this is a reflection of decreasing labour force participation rather than an increase in jobs.
The stagnant employment market is impacting on retail sales with retail sales rising less than forecast in July.
House prices remain abysmal. Foreclosures continue to run near record levels as a sour job market keeps more and more Americans from making their mortgage payments.
Coincident Indicators – US GDP growth is weaker than first thought, industrial production is weak and U.S exports are slowing.
Leading’ Indicators – Consumer confidence remains near eight-month lows. Consumers are feeling less confident about the stability of the economy, their jobs and their incomes and as such spending activity is expected to remain sluggish.
Turning to the Markets…
All this does not bode well for the second half of 2010 and beyond. An uncertain labour market continues to affect consumer confidence. With consumer spending activity accounting for approximately 70% of U.S GDP any prolonged recovery in the jobs market will impact on GDP unless assisted by further Government spending.
Since the highs set in late April the major U.S indices have become locked in an extended sideways movement. Since April 26th the Dow has had a slightly higher number of down days (56%) to up days (44%). Over this time the market has declined close to 8%.
The Outlook
The DOW is trapped in a trading range with support being found around 9700 and resistance at 10900. The sideways movement confirms the uncertainty of market participants. Given the weak U.S economic data and continuing global uncertainty the greater risks are definitely to the downside.
Whether this trading range is a continuation pattern for the prior market rally or a distribution pattern for the next down phase in a larger bear market is uncertain. Looking to the charts will provide some assistance in making an assessment of future market moves.
For an extended move up to resume the DOW needs to close and hold above 10900. Alternative if the DOW was to fall beneath 9700 a confirmation of lower peaks and lower troughs will signal the beginning of a new, sustained down move.
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