Industrial Production – Easy Trends (thru March 2014)

Let’s talk about industrial production, its importance and the current trends.  I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest industrial production trend analysis for more info.

Quick ‘n Easy

Industrial Production (IP) measures how much is being produced by factories, mines and utilities.  The changes in IP track very closely with changes in the overall economy.

First, a nice summary of what Industrial Production (IP) is from Econoday:

The index of industrial production shows how much factories, mines and utilities are producing.  The manufacturing sector accounts for less than 20 percent of the economy, but most of its cyclical variation.  Consequently, this report has a big influence on market behavior.  In any given month, one can see whether capital goods or consumer goods are growing more rapidly.  Are manufacturers still producing construction supplies and other materials?  This detailed report shows which sectors of the economy are growing and which are not.

Easy Translation: The first sentence is probably enough for an understanding – what’s being produced at factories, mines and utilities.  The second sentence is a key detail though.  Because it relates to manufacturing, and manufacturing is only about 20 percent of our economy, at first glance one might consider this indicator not important.  But the changes in the manufacturing sector track the changes in the economy extremely well.  In other words, the cycles of the two are well matched, making IP incredibly important to track.

Here’s a ten-year chart of the Industrial Production Index from the Federal Reserve Bank of St. Louis (a level of “100″ represents the level in 2007):

Industrial Production Index - March 2014 - FRED

Source: StLouisFed.org

Industrial Production Trends and Projections

Below, I will discuss whether industrial production is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. I generally start my analysis from 3 years ago. continue reading…

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Stock Market Forecast Update

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EASY NOTE: I offer email newsletters documenting portfolio simulations that apply a concept with solid backtesting and intuitively sound principles.  Click here to learn more about the newsletters or sign up to receive them.  If they’re not outperforming the S&P 500 … they’re free!

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I have updated my Stock Market Forecast page with the latest systems I’m testing.  You can read the explanation there in detail.  The quick summary is that I’m doing two primary models (4-week and 13-week), both using a linear regression model (a statistical way of finding a straight-line relationship between a set of variables and a calculated outcome) that involves four different technical analysis data points.

I graph the stock market forecast for each model over the coming 4-week or 13-week period.

Lastly, I will issue two weighted combination forecasts each week in my update post, each of which makes only one “official” forecast for the record book.  One represents a weighted average between where the two models think the S&P 500 will close this upcoming week.  The weights are based on how well each model explains the ups and downs of the S&P 500 – that is, using the “r-squared” for the regression analysis.  The other is a “Headline Adjusted” model, which tries to account for the fact that extreme and unforeseen events can throw off the models.  So, I remove data that seems affected by such effects and keep the more pure data.  This model will also make only one forecast, one week in advance.

Performance of Last Week’s Forecast

Weekly Direction of the S&P 500

Correct:   4-week   /   13-week   /   Weight-Adjusted Combo/   Headline-Adjusted

Incorrect:   None

 

Accuracy of the Weight-Adjusted Combination Models

Regular Weight-Adjusted Combination: 0.82 percent too optimistic

Headline-Adjusted Combination: 1.84 percent too pessimistic

 

Accuracy of Individual Models

4-week Model:  2.02 percent too optimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  2 out of 4 predictions

Notes: All four times it made a forecast, it was too optimistic (by 2.02 to 2.05 percent). It got the direction from that point through the forecast date correct on 2 of its 4 attempts.

 

13-week Model:  0.51 percent too optimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  11 out of 13 predictions

Notes: The model started out about 0.45 percent too optimistic and barely worsened to finish about 0.51 percent too optimistic.  It got the direction right on 11 of its 13 attempts but only 2 of its final 4 attempts.

 

Estimated Effect of Headlines on Current Market Value

NOTE: This is based on a calculation I do after running the current week’s headline-adjusted forecasts.

4-week Model: Negative effect of  2.7 percent   (down 0.5 percent from last week)

13-week Model: Negative effect of 0.7 percent   (up 2.2 percent from last week)

Notes: The headline effect went up an average of 0.85 percent from last week, so headlines are artificially holding down the market right now by about 1.7 percent (equally-weighted average of the two models).  Note: This may not be the same as the difference between the “weighted combo” and “headline-adjusted” forecasts because those forecasts are weighted according to the accuracy of each model.

 

Stock Market Forecast Summary for Upcoming Week

Here’s the breakdown:

continue reading…

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Note to my readers…

Due to a busy schedule, I likely won’t be able to post anything until Tuesday. I will do my best to complete my weekly stock market forecast by Sunday night, but it’s possible I won’t be able to publish it until Tuesday (in which case it will still be the same as what it would have been if I’d posted it Sunday – i.e., no cheating by me). Apologies.

Thanks for your continued support…

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Economic Indicators Roundup (April 15, 2014)

Economic indicators are everywhere, so this is kind of like a dashboard that I like to follow.  For each indicator, I will try to give you a brief description, the latest reading and what I understand to be its implications.  For simplicity, I will assign each a rating of positive, neutral or negative.  For the economic indicators, I will denote in each one’s section how I decide which rating to give it.  At the end, I assign an overall rating, but this is just to guide me in my takeaway of where things stand.  It’s not scientifically rigorous or anything.

  • Positive - indicative of a healthy, growing economy.
  • Neutral - indicative of a slow or no growth economy but not a contracting (recession) economy.
  • Negative - indicative of a shrinking economy or recession.

(NOTE: For a “Quick ‘n Easy” read, just review the labeled white boxes, then skip to my “Easy Take” summary at the end.  You can review any charts/graphs afterward.  I want to make sure no one is intimidated by the length of my posts, even though I’m trying to making them easy …)


Quick Summary

Indicator (Click for details – only works if full article is open) Current Rating (change from previous roundup)
ADS Business Conditions Index Positive
Bloomberg Financial Conditions Index Positive
Daily Consumer Leading Indicators Negative
Citigroup Economic Surprise Index Negative
Employment Trends Index Positive
Chicago Fed National Activity Index Neutral
Easynomics Real Estate Price Stability Index Positive
Easy Trends Dashboard   (min/max -3 to +3) +2.56 = Definitely moving in a positive direction, with very few unconfirmed trends or off-trend readings

NOTE: You may be reading an outdated analysis.  Please visit my latest economic indicators roundup.



Economic Indicator: ADS Business Conditions Index   |   POSITIVE
Easy Intro to ADS Business Conditions Index   |   Link to Source   |   Latest Date This Info Represents: April 5, 2014

Quick ‘n Easy

A combination of several key indicators of business conditions suggests, with high confidence, that at the end of December 2013 (most recent date for which there is data for all components of the index), conditions were below average (-0.486).  As of about a week and a half ago, it suggested, with low confidence, that current conditions were slightly above average (+0.143), historically speaking.  The index suggests that economic activity took a temporary dive in late 2013 before bouncing back quickly to levels that are slightly above historical averages.

Economic Indicators - ADS Business Conditions Index April 5 2014

Source: PhiladelphiaFed.org

Easy Description: Combines several indicators together to describe current business conditions.  A value above zero means that conditions are better than average, but below zero means worse than average.

Latest Readings:

April 5, 2014: Positive (+) 0.143 (includes weekly unemployment figures and maybe one other indicator)

One month prior: Positive (+) 0.109
One quarter prior: Negative (-) 0.521

The most recent date for which there is data for all components of the index is end of December 2013, when conditions were below average (-0.486).

Implications: It looks like conditions took a hit after reaching an interim high in mid-November 2013.  Fortunately, we never went into a recession-type shrinking phase, and preliminary data suggest that conditions quickly bounced back up to above average levels since mid-February.

Additional Info: This index provides confident readings about the past when all of the indicators have been collected (everything to the left of the left-most vertical line).  The readings in between the two vertical lines are somewhat less confident because they include some, but not all, of the indicators.  And the latest reading always falls to the right of the right-most vertical line and includes only a couple of indicators.

Easynomics Rating Methodology: For this index, I will use the very latest reading and rate anything between zero and minus (-) 1.00 as “neutral” – anything above or below that will be rated “positive” or “negative” respectively.

continue reading…

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Stock Market Forecast Update

*********************

EASY NOTE: I offer email newsletters documenting portfolio simulations that apply a concept with solid backtesting and intuitively sound principles.  Click here to learn more about the newsletters or sign up to receive them.  If they’re not outperforming the S&P 500 … they’re free!

*********************

I have updated my Stock Market Forecast page with the latest systems I’m testing.  You can read the explanation there in detail.  The quick summary is that I’m doing two primary models (4-week and 13-week), both using a linear regression model (a statistical way of finding a straight-line relationship between a set of variables and a calculated outcome) that involves four different technical analysis data points.

I graph the stock market forecast for each model over the coming 4-week or 13-week period.

Lastly, I will issue two weighted combination forecasts each week in my update post, each of which makes only one “official” forecast for the record book.  One represents a weighted average between where the two models think the S&P 500 will close this upcoming week.  The weights are based on how well each model explains the ups and downs of the S&P 500 – that is, using the “r-squared” for the regression analysis.  The other is a “Headline Adjusted” model, which tries to account for the fact that extreme and unforeseen events can throw off the models.  So, I remove data that seems affected by such effects and keep the more pure data.  This model will also make only one forecast, one week in advance.

Performance of Last Week’s Forecast

Weekly Direction of the S&P 500

Correct:   4-week   /   Headline-Adjusted

Incorrect:   13-week   /   Weight-Adjusted Combo

 

Accuracy of the Weight-Adjusted Combination Models

Regular Weight-Adjusted Combination: 2.78 percent too optimistic

Headline-Adjusted Combination: 2.21 percent too optimistic

 

Accuracy of Individual Models

4-week Model:  2.71 percent too optimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  2 out of 4 predictions

Notes: All four times it made a forecast, it was too optimistic (by 2.68 to 2.71 percent). It got the direction from that point through the forecast date correct on 2 of its 4 attempts.

 

13-week Model:  2.80 percent too optimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  4 out of 13 predictions

Notes: The model started out about 2.7 percent too optimistic and slightly worsened to finish about 2.8 percent too optimistic.  It got the direction wrong on 7 of its final 8 attempts.

 

Estimated Effect of Headlines on Current Market Value

NOTE: This is based on a calculation I do after running the current week’s headline-adjusted forecasts.

4-week Model: Negative effect of  2.2 percent   (down 0.5 percent from last week)

13-week Model: Negative effect of 2.9 percent   (down 2.6 percent from last week)

Notes: The headline effect went down an average of 1.55 percent from last week, so headlines are artificially holding down the market right now by about 2.55 percent (equally-weighted average of the two models).  Note: This may not be the same as the difference between the “weighted combo” and “headline-adjusted” forecasts because those forecasts are weighted according to the accuracy of each model.

 

Stock Market Forecast Summary for Upcoming Week

Here’s the breakdown:

continue reading…

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Stock Market Technical Analysis – Tech It Easy (thru April 11, 2014)

Stock market technical analysis is all you need to know, complete hogwash or somewhere in between.  It depends on who you ask.  If you find it interesting, you’ll probably like reading this weekly feature.

NOTE: You may be reading an outdated article.  Please visit my latest stock market technical analysis summary of the S&P 500 for more.

This is my standard intro to stock market technical analysis – you can skip down to the table (or click “continue reading”) if you read this feature regularly:

Many people who trade in the markets believe that there are patterns that can generally lead to profitable trades.  By analyzing stock charts that show the change in price along with the volume (how many shares were traded), “technical analysts” believe they have an edge and can time their trades profitably.  There is significant controversy over this subject, however.  Others say that, unless you have some information that no one else does, basically you can never beat “the market” because everything is already baked into the current price of a stock.

Nevertheless, supporters of stock market technical analysis are everywhere, and the tools for their trade can be found throughout bookstores and the Internet.  I like to follow some websites that do some of the work automatically and provide a snapshot opinion of whether a particular stock is considered “bullish” (going to go up in price), “bearish” (going to go down in price) or “neutral” (stay about the same price).

For simplicity, I’d like to start by showing you a snapshot of what several stock market technical analysis websites suggest about the exchange traded fund (ETF) with the ticker symbol of SPY.  This fund is supposed to go up and down the same as the S&P 500 index does.  And many people consider the S&P 500 index (a measure of the price of the 500 largest companies that trade in the U.S.) to be an accurate gauge of where “the market” stands.

For each of the sources below, where I have a choice, I will use a measure that attempts to predict the future direction of SPY or S&P 500 in the next 3 months.

S&P 500 Technical Analysis Summary

Source: Barchart.com   |   NEUTRAL

Quick ‘n Easy

Barchart.com uses three analyses to predict the direction of SPY over the next three months or so.  Looking at the average value and strength of these three signals, we can conclude that BarChart.com thinks that the price of SPY will stay about the same over the next three months.

Stock Market Technical Analysis - Barchart SPY Long Term Opinion April 11 2014

Source: BarChart.com

Easy Notes: BarChart.com says that the price of SPY will probably stay about the same over the next three months.  This is the 5th consecutive “neutral” assessment after 5 consecutive weeks at a “bullish” rating.  Only one of three signals is at “buy,” and it’s at weak strength.  Unfortunately, only one of three signals is headed in the right direction (the right direction would mean “buy” signals are strengthening and “sell” signals are weakening).  Overall, this is a neutral assessment.

continue reading…

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