T_Slim Posted June 30, 2010 Report Share Posted June 30, 2010 It's Here "In the US, it’s far worse. There the index of consumer confidence has taken a dive along with retail sales. The housing market, as this blog has faithfully tried to show you, is getting worse by the day. Billions in direct incentives – actually paying people to buy homes – failed to do anything. Worried households have suddenly realized they have to stop spending, and start saving. It’s now entirely possible the next few months could bring a spiral of less spending, lower prices, fewer profits, lost jobs and less spending. That’s called deflation. The stock market has responded by doing what it does best, being a leading indicator. Following the useless and insipid Toronto summit at which leaders failed to lead, it has charged lower as investors contemplate months or years of less. That has caused volatility to spike in a way not seen since the Panic of ’08, following a realization Europe’s debt crisis is unsolvable, Chinese growth is slowing and Obama wants to keep writing cheques." I couldn't help but laugh after reading the second paragraph. And then, the wisdom of Doc comes to mind: What does the stock market have to do with the real economy . . . absolutely nothing. A leading indicator? Right . . . Link to comment Share on other sites More sharing options...
DrStool Posted July 1, 2010 Report Share Posted July 1, 2010 Yup. The stock market is a measure of liquidity, as is economic data. The timing of which leads and which lags is variable, random, and unpredictable. Link to comment Share on other sites More sharing options...
ChicagoBear Posted July 1, 2010 Report Share Posted July 1, 2010 Ditto - Doc taught me that invaluable piece of info. The stock market is just a liquidity barometer. I still remember the good old days, back before the crash, when OMO were something to be monitored daily. Did the Fed pump or drain? Mix in some FCB weekly action and presto - did money go in or come out? His market liquidity chart was all you needed to watch. Today, all you really need to watch are Treasury auctions. Are they asking for a little new cash, or a lot? July will be veeery interesting! Link to comment Share on other sites More sharing options...
ChicagoBear Posted July 1, 2010 Report Share Posted July 1, 2010 I used to subscribe to the ECRI (economic cycle research institute). They report a "leading indicator" called the WLI. It was supposed to be their main source of calling turning points in economic cycles. After studying their data for several years, I came to realize that the WLI wasn't doing much more than following the stock market. So, having nothing better to do with my time, I entered it all into an excel spreadsheet, ran the correlation, and charted it. Guess what? The WLI and the SP500 were correlated .86! I think it was more fair to say the stock market and the WLI are concurrent indicators. They only tell you what's happening today. All that bunk about the markets looking "6 months" down the road is garbage. The WLI also failed to detect or indicate the crash of '08. This "leading indicator" didn't go down until the markets did. If the markets knew that QEII was coming in the next 6 months, they'd be buying hand over fist. No, Doc is right. The stock market is just the current state of liquidity. Link to comment Share on other sites More sharing options...
fxfox Posted July 1, 2010 Report Share Posted July 1, 2010 ChicagoBear, very nice work! I like that very much when people investigate if things are really like other folks say they are. Nice job with that Excel spreadsheet! Tanks. What I ask myself: Why is it that this mantra that the stock market is looking 6 months ahead is holding up since such a long time? I mean, it cant be that Doc is the only person on earth who proofs that in fact the stock market is a measurement of the CURRENT state of the liquidity situation. I guess at least all the major investment banks know this too. But among the fund management induswtry it became a marketing instrument to attract new capital inflows. I think it also could be that this false mantra holds up since decades because of the job market is always a lagging indicator. Means, job market reacts to a rising stock market something like 6 months later and only if jobs growth the public perceives that as a sign that the economy is improving/doin getter. It seems It is something like a misperception, but I really dunno. Would love to see a chart were we could see the correlation of stock market and GDP numbers. There we could see if that "looking 6 months ahead" mantra is completely false or if it has some merit. Link to comment Share on other sites More sharing options...
DrStool Posted July 2, 2010 Report Share Posted July 2, 2010 ChicagoBear, I think it also could be that this false mantra holds up since decades because of the job market is always a lagging indicator. Means, job market reacts to a rising stock market something like 6 months later and only if jobs growth the public perceives that as a sign that the economy is improving/doin getter. False. Hate to bust your bubble. I have often posted charts showing that employment changes sometimes LEAD the stock market, but they're usually CONCURRENT, and NEVER lag, at least not by much, if my recollection is accurate. The timing of these things is all random. Depends on stuff like spec fever. If the specs are dead, the economic numbers lead, like they did in the early-mid 904 before the bubble took off. Those employment correlation are floating around somewhere. Link to comment Share on other sites More sharing options...
DrStool Posted July 2, 2010 Report Share Posted July 2, 2010 Most good traders make no attempt to correlate the economic data with the market. They innately know better. Link to comment Share on other sites More sharing options...
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