Page 148 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 7: Fundamental Analysis 1: Economic Analysis

In developed countries, data relating to various indicators are published at short intervals. For Notes
example, the Department of Commerce publishes data regarding various indicators in each of
the following categories:

Leading Indicators

Average weekly hours of manufacturing production workers
Average weekly in initial unemployment claims
Contacts and orders for plant and machinery

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

Index of consumer expectations.
Coincidental Indicators

Index of industrial production
Manufacturing and trade sales
Employee on non-agricultural payrolls
Personal income less transfer payment

Lagging Indicators

Average duration of unemployment

Ratio of manufacturing and trade inventories to sales
Average prime rate
Outstanding commercial and industrial loans
The above list is not exhaustive. It is only illustrative of various indicators used by investors.
A word of caution will not be out of place here as forecasting based solely on leading indicators
is a hazardous business. One has to be quite careful in using them. There is always a time lag it
with result that interpretation can be erroneous, if it is not done well in advance. Interpretation
even if performed meticulously, cannot be fruitfully utilized. Further, problems with regard to
their interpretation exist as well. Indicators are classified under the broad category of leading
indicators. Their various measures may emit conflicting signals about the future direction of the
economy; the use of diffusion index or composite index has, thus, been suggested. This deals
with the problem by combining several indicators into one index in order to measure the
strength or weaknesses of the problem by combining several indicators into one index in order
to measure the strength or weaknesses of a particular kind of indicator. Care has to be exercised
even in this case as diffusion indices are also without problems. Apart from the fact that its
computations are difficult, it does not eliminate the varying factors in the series. Despite these
limitations, indicator approach/diffusion index can be useful tool in the armoury of a skilful
forecaster.

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