Predicting the Markets 3–6 months ahead using Economic Indicators.
As Traders we know that we are slaves to volatility and intraday-trading is now outsourced to algorithms that predict our behavior and other algorithms that predict the previous algorithms, thus we have to look at longer term trades in the 3 to 6+ months time-period unless the VIX (Volatility Index) spikes over $25 telling us we can now day-trade as volatility for the month is predicted to grow.
Our job is to predict the markets 3–6mo out using leading/confirming indicators and intuition while eventually day-trade (7–15 days) out when the VIX spikes.
We assess our market, be it the currently leading United States economy, European Economic Area or Asia. We’re going to cover how we assess the currently leading economy via US specific indicators and attempt to predict the future 3 to 6mo out.
We’ve identified the most reliable (for us) forward looking & confirmation indicators to be:
- ISM/PMI
- GDP
- Personal income
- Employment
We know that the US consumer drives ~60% to ~80% of the economy depending on the year, thus assessing Personal Income and Employment would give us more than half the sentiment we need for predictions. By visiting (https://www.bls.gov/news.release/empsit.htm) we can see that “nonfarm payroll employment rose by 850,000 in June” and “unemployment rate was little changed at 5.9 percent” and “job leavers: increased by 164,000 to 942,000 in June”. We suggest you read the whole first section and look at some tables as well, moreover our employment sentiment is positive.
Employment+
Personal income is tracked via (https://www.bea.gov/news/2021/personal-income-and-outlays-june-2021-and-annual-update) and we can see “Personal income increased $26.1 billion (0.1 percent) in June” and “personal consumption expenditures (PCE) increased $155.4 billion (1.0 percent)”, giving us another positive outlook on the economy.
Income+
GDP can be tracked via (https://www.bea.gov/news/2021/gross-domestic-product-second-quarter-2021-advance-estimate-and-annual-update) and we can see that GDP is driven mostly by PCE outlined above and is growing this quarter by 6.3%. Another positive outlook.
GDP+
Now for the final indicator we’ll look at ISM/PMI (https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/june/) which any score over 50 shows us a growing economy, although the trend of growth started slowing down telling us there’s going to be less volatility and more profit taking in the future.
The PMI also tells us which industries are showing the most growth, thus we can identify trading opportunities in those sectors and position ourselves ahead e.g. by reading this statement: “Of the 18 manufacturing industries, the 15 that reported growth in new orders in June — in the following order — are: Furniture & Related Products; Printing & Related Support Activities; Transportation Equipment; Miscellaneous Manufacturing; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Machinery; Chemical Products; Computer & Electronic Products; Fabricated Metal Products; Paper Products; Plastics & Rubber Products; Petroleum & Coal Products; Primary Metals; and Food, Beverage & Tobacco Products”. These are ordered by most-growth to least-growth.
PMI+ w/ slowdown and profit taking after bull run.
Knowing the above, all we have to do is scan the markets in the growing sectors for ideas and place LONG orders 3 to 6mo out while every month after new data is released assess our positions and decide to keep going or exit our trades. I know this may sound simplistic but that’s all there is to trading the US markets, we could make it more complicated, although we believe this is a good starting framework for success upon which every trader can add his unique views, expertise, intuition and further complications.
I hope you’ve learnt something from this, and if you did we invite you to follow me on Twitter, where we use the above while adding our unique views and intuition to successfully trade the markets.
May the future be with you!
