When it comes to tracking the economy there are countless indicators out there. However, not all of them are worth tracking on a regular basis. There are various indicators that gauge the health of the economy and that are important especially when relating to the stock market. Typically, what s good for the economy is good for stocks. As a trader you will need to know what to look for so you can use the indicators we are going to discuss to measure where we are in the economic cycle.
Rising or falling commodity prices reflect current economic conditions. However, the best way to tell what the future holds is to look at rates of change in commodity prices. By anticipating major changes you can be on the right side of the market before the public recognizes a change in the economic conditions. Basically if you are a step ahead of the public, you can increase your profit potential.
For equity investors, a good way to pinpoint the direction of inflation is to compare year-over-year rates of change between producer and consumer prices. When producer prices are rising faster than consumer prices, consumer prices will usually heat up as well. On the other hand, when producer prices are trailing, inflation at the consumer level will soon tail off.
Stock traders should also take a look at employment. The most reliable number for the stock markets is unemployment insurance claims, which is released every Thursday morning. When unemployment insurance claims are rising, the economy will not overheat. There is also less upward pressure on wages, which is inflationary. Falling unemployment insurance claims are negative for the economy. This often signals that little room is remaining for continued economic growth. Pressure on wages is increased, making way for rising inflation.
It is essential that a stock market trader monitor interest rates. Interest rates represent the cost of money. When interest rates are low, borrowing to expand operations is inexpensive. When interest rates are high the cost of borrowing is high. Falling interest rates are good for stocks, since lower yields mean less demand for money and lower inflationary expectations. However, when bonds are higher than they were the 12-months before, the economic climate for stocks is unfavorable. The relationship is pretty simple: what s good for the economy is good for the stocks.
Finally, a good stock market analyst needs to track the money supply. M2 is a broad definition of the money supply, which includes: all cash in circulation, demand deposits and money market accounts. M2 is a measure of liquidity, reflecting the economy s ability to expand. The analyst needs to examine the year-over-year change. When the money supply is growing, the economy has room to expand. That s good for stocks. When money supply growth slows, the economy is running out of room to expand which is bad for stocks.
Keep these indicators in mind when putting together your broad market analysis because they will help you immensely. As a result your overall stock market timing will dramatically improve.
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