Page 121 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Despite the above limitations, surveys are very popular in practice and used for short-term
forecast of course, requires continuous monitoring.

4.1.4 Barometric or Indian Approach

In this approach, various types of indicators are studied to find out how the economy is likely to
behave in future. For meaningful interpretations, these indicators are roughly classified into
leading, lagging and coincidental indicators.
Leading Indicators: As the name suggests, these are indicators that lead the economic activity in
their outcome. That is, these are those time series data of the variables that reach their high
points as well low points in advance of the economic activity.
Lagging Indicators: These are time series data of variables that lag behind in their consequences
vis-à-vis the economy. That is, these reach their turning points after economy has already
reached its own.
In developed countries, data relating to various indicators are published at short intervals.

Example: The Department of Commerce publishes data regarding various indicators in
each of the following categories.

1. Leading Indicators
(a) Average weekly hours of manufacturing production workers
(b) Average weekly in initial unemployment claims
(c) Contacts and orders for plant and machinery

(d) Index of S&P 500 stock prices
(e) Money supply (M2)
(f) Change in sensitive material prices
(g) Change in manufacture's unfilled orders (durable goods industries)

(h) Index of consumer expectations.
2. Coincidental Indicators
(a) Index of industrial production
(b) Manufacturing and trade sales

(c) Employee on non-agricultural payrolls
(d) Personal income less transfer payment
3. Lagging Indicators
(a) Average duration of unemployment

(b) Ratio of manufacturing and trade inventories to sales
(c) Average prime rate
(d) Outstanding commercial and industrial loans
The above list is not exhaustive. It is only illustrative of various indicators used by investors.

116 LOVELY PROFESSIONAL UNIVERSITY