We’ve compiled a glossary of economic and technical indicators that we follow frequently to help explain their intricacies and importance.
Macroeconomic Indicators
Builder Confidence (Housing Market Index)
The National Association of Home Builders (NAHB) publishes a monthly Housing Market Index (HMI – also known as Builder Confidence) based on a survey of its members designed to assess the state of the single-family housing market. The report is published mid-month and covers activity for the first half of the same month. The HMI is a weighted average of the results of questions on current conditions, future expectations, and current prospect traffic for single-family homes and is a strong measure of builder confidence.
Case-Shiller Home Price Index (HPI)
The S&P CoreLogic Case-Shiller Home Price Index (HPI) claims to be a leading measure of U.S. home prices by using a more precise calculation than other measures of home price changes over time. What makes the S&P/Case-Shiller HPI stand out is its repeat sales method and creation of sales pairs – i.e. “When a home is resold, months or years later, the new sale price is matched to its first sale price.” It also weights the sales pairs to control for quality change in the measured homes and uses a three-month moving average. The report has a two-month lag.
Consumer Confidence
The Conference Board (CB) releases the Consumer Confidence Index on a monthly basis to track how consumers feel about the economy, employment, and spending. The supporting data is based on surveys of about 5,000 different consumers each month and asks questions regarding the current economic conditions as well as their outlook six months ahead.
In addition to the Consumer Confidence Index, the CB also publishes two other Indexes in the same report – the Present Situation Index, which focuses on current conditions, and the Expectations Index, based on near-term outlooks.
Consumer Credit (G.19)
This monthly series from the Federal Reserve’s G.19 Statistical Release provides data on outstanding consumer credit excluding mortgages and real-estate related loans. It tracks both revolving and non-revolving debt – credit card loans make up the majority of revolving debt while car and student loans comprise the bulk of non-revolving debt. The series calculates annual percentage changes using responses from mandatory and voluntary surveys and reports on data from two months prior.
This release is an important one to follow each month as small businesses are quicker to react to a changing economic climate and a large part of the U.S. economy – at least 2 of every 3 new jobs – are in small businesses.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is one of the most well-known economic indicators that tracks inflation, or simply put the price of goods and services. More than half of this Index tracks services, which makes up 70% of the U.S. economy. The CPI attempts to gauge the cost of living by tracking the average change in retail price over time for a (large) basket of goods. This basket of goods and services consists of over 200 categories that are weighted based on importance in the CPI calculation. These weightings are determined by surveying thousands of consumers on actual purchases and is revised every two years to reflect changing tastes and priorities.
Consumer Sentiment
The Consumer Sentiment Index from the University of Michigan surveys consumers monthly using about 50 questions that track different aspects of their attitudes and expectations around personal finances, business conditions, and buying conditions. In addition to this index, the group also publishes the Index of Consumer Expectations and the Index of Current Economic Conditions.
Published twice a month – one Preliminary and one Final reading – this is an important indicator to watch as consumer attitudes greatly impact consumer spending which makes up over 70% of GDP.
Existing Home Sales
This monthly indicator from the National Association of Realtors (NAR) publishes the volume of existing home sales and sales prices of those homes. Homes include single-family homes, townhomes, condominiums, and co-ops. It’s worth following as purchases of existing homes reflect buyers’ confidence in their employment and future income growth. Home prices have a significant wealth effect on the economy as rising prices lead to an increase in consumer spending while falling prices can result in a notable decline in consumer behavior.
This release is typically published four to five weeks after the month being reported ends and usually has a strong correlation with Pending Home Sales (also published by NAR). The report includes national figures, breakdowns by region, unsold inventory in months, and the median and average sales prices nationwide.
Household Debt and Credit Report
The Federal Reserve Bank of New York’s quarterly Household Debt and Credit Report covers a large sample of individuals through detailed, but anonymous Equifax credit report data. The report includes analysis on a variety of debt, including credit card, student, and auto loans as well as housing debt like mortgages and home equity lines of credit.
Housing Starts and Building Permits
This monthly release from the Census Bureau tracks the number of new homes being built and permits for future construction. Home building has quite a strong effect on the economy – from demand (or lack thereof) for associated labor, building materials, and goods to furnish homes – the industry can affect many diverse businesses. Housing starts include building of single-family homes, buildings with two to four units, and buildings with five or more units. Building permits are required in advance of a build in most locations and tend to be a good predictor of future home building activity. Incidentally, Building Permits are one of the ten components of the Conference Board’s Leading Economic Index.
Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI)
The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI), released on the first business day of each month for the previous month, surveys purchasing and supply executives around the country on new orders, production, employment, and much more. Manufacturing supply executives are polled on their view of the current economic climate in relation to their respective businesses. The ISM Manufacturing PMI is a diffusion index – “they have properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change”. A reading above 50 percent indicates that the manufacturing economy is generally expanding while a reading below 50 percent indicates that it is generally declining. The ISM Manufacturing PMI is considered a highly reliable gauge of current business conditions for the manufacturing sector.
Institute for Supply Management (ISM) Services Purchasing Managers’ Index (PMI)
The Institute for Supply Management (ISM) Services report, released on the third business day of each month for the previous month, surveys purchasing and supply executives around the country in over 20 service industries like legal services, entertainment, real estate, professional, and finance & insurance. Levels above 50 indicate expansion while below 50 imply contraction. The index includes the following components: Business Activity, New Orders, Employment, Supplier Deliveries, Inventories, Prices Paid, Backlog of Orders, New Export Orders, Imports, and Inventory Sentiment.
Job Openings and Labor Turnover Survey (JOLTS)
The monthly JOLTS report, published by the U.S. Bureau of Labor Statistics, provides data on labor demand and turnover. The release is already two months old when it comes out, but this important indicator gives us a pulse on the job market and can provide confirming macroeconomic evidence.
Leading Economic Index (LEI)
The Conference Board’s Leading Economic Index (LEI) is published monthly and is one of the most important and widely recognized leading indicators of the U.S. economy. The LEI is a composite index, made up of ten components that include employment, manufacturing, housing, consumer sentiment, stock prices, and credit. Typically, when the LEI has been in a downturn, it’s a sign of impending or current recession.
Monthly Employment Report (Employment Situation Summary)
This monthly report from the U.S. Bureau of Labor Statistics is a mover and shaker in the markets that measures labor force status, hours worked, earnings, and unemployment of private nonfarm businesses using two major surveys. This highly watched indicator is released just after month-end, typically the first Friday of the following month. When the 12th of the previous month falls on a Sunday, the report is released on the second Friday of the following month.
New Home Sales
The Census Bureau’s monthly New Home Sales figures track sales of new single-family houses on a seasonally adjusted basis. Also published is the median sale price of these homes. New home sales is considered a more timely measure of housing market conditions and is influential due to its impact on the wider economy – it generates investment, new jobs, and increased spending.
Pending Home Sales
The Pending Home Sales Index from The National Association of Realtors (NAR) is a leading indicator for the housing sector based on pending sales of existing homes. A sale is pending if a contract has been signed, but the sale has not yet closed. Typically, these sales close within two months of a contract signing.
Personal Consumption Expenditures (PCE) Price Index
The Bureau of Economic Analysis (BEA) releases PCE monthly – it’s the most comprehensive measure of consumer spending which in turn makes up about two-thirds of GDP. The Index is made up of goods and services – and is also the Fed’s preferred measure of inflation. Why? Largely because the PCE Price Index is believed to reflect consumer spending habits more accurately than the other widely followed inflation measure, the Consumer Price Index (CPI). The PCE Price Index considers both urban and rural populations and includes all expenditures purchased on behalf of the consumer including those by a third party, like health insurance purchased for employees, while CPI includes the urban population and out-of-pocket expenditures. Essentially, the PCE Price Index includes a broader bucket of expenditures in its calculation. Additionally, the underlying component weightings for the PCE Price Index adjust more frequently in response to changing consumer preferences. CPI weights are fixed every two years while PCE Price Index weights use current time periods to reflect actual pricing.
Producer Price Index (PPI)
The Producer Price Index (PPI) is similar to the CPI in that it also tracks prices. The major difference is that it measures the change in prices paid by businesses rather than consumers. These are prices that manufacturers and wholesalers pay for goods and services at various stages of production. The PPI is the wholesale inflation at the final stage of production prior to goods being shipped out to wholesalers and retailers and represents all types of commodities sold for personal consumption, capital investment, government, and export.
Regional Manufacturing
There are a dozen regional Federal Reserve Banks across the country of which five have manufacturing surveys that are tracked monthly to assess prices, labor, inventory, revenue, sales, and credit, among other topics relating to manufacturing. These represent the broader geography in the Central bank’s regions of Richmond, Philadelphia, Kansas City, New York, and Dallas. It can be seen as an overview of the state of manufacturing nationwide and a good supplement to other manufacturing indexes.
Retail Sales
The monthly Retail Sales report from the Census Bureau measures consumer spending, which makes up a large portion of all economic activity. It therefore tends to be an indicator of overall economic health. Retail sales are gathered from surveys to retailers and measures only retail spending like groceries, clothing, and food services, but not spending on things like air travel or recreation.
Small Business Optimism Index
The National Federation of Independent Businesses (NFIB) collects small business trend data by surveying their membership base on a monthly basis. The Small Business Optimism Index series goes back to 1973 (quarterly surveys, monthly starting in 1986) and is released on the second Tuesday of each month.
InvesTech Proprietary Indicators
Up-to-date graphs of these indicators are available on the InvesTech Indicators page.
Artificial Intelligence Index
This index tracks the market exuberance surrounding the excitement in Artificial Intelligence-related stocks. It is composed of 9 of the top AI-heavy stocks that are representative of investor sentiment —and the potential asset bubble— surrounding the AI phenomenon. A downward trend in the AI index indicates a faltering in investor exuberance which will likely flow into the broader indexes.
A/D Divergence Index
The AD Divergence Index is an improvement on the popular Advance-Decline (A-D) Line —the cumulative total of daily advancing issues minus declining issues— which is used to measure stock market “breadth” or participation. The AD Divergence index takes the A-D Line and adjusts it for the changing number of stocks, effects of decimalization, and normal breadth trend in bull markets. The resulting indicator reveals the difference between what the S&P 500 Index should hypothetically be trading for given the current trend in breath, versus where the index is actually trading. To use this index, a sideways movement is a bullish confirmation that market moves are proportionately supported by breadth; however, downward movement shows a breakdown in breadth which is not yet reflected in the index price performance. When this downward trend reaches a historically meaning level in conjunction with other breadth measures, it becomes an excellent warning of an impending bear market or major correction.
Bellwether Index
The bellwether index is comprised of stocks that have reliably led the broad market averages at market tops. These stocks have a variety of key characteristics including sensitivity to interest rates, underlying economic conditions, or consumer spending. Underperformance in our Bellwether Index relative to the S&P 500 Index is a warning flag that either a steep correction or bear market are on their way. Both relative and absolute divergences have acted as important warning flags in the past. It is important to keep in mind that the Bellwether Index is NOT a leading indicator at market bottoms and outperformance of the S&P 500 should not be taken as a bullish signal.
Canary (in the coal mine) Index
This index was designed to provide an early warning of danger, just like the canaries that coal miners would carry in the early 1900’s to warn them of dangerous gases. The Canary is made up of approximately 20 of the hottest most speculative and overvalued stocks coming out of the Covid-19 pandemic. It served its original purpose, as it delivered a dramatic warning signal prior to the peak in major indexes in early 2022, however it still carries value in tracking the long and painful unwinding of speculation.
Gorilla Index
The Gorilla Index is actually the Gorilla Index 2.0, named after an index we originally created in the late 1990’s which provided key warnings surrounding the peak of the Tech Bubble. The Gorilla 2.0 is made up of just 10 stocks that account for nearly a third of the market capitalization of the S&P 500. This index tracks today’s extreme concentration risk and will provide bear market warning flags when it breaks through key support levels.
Housing [Bubble] Bellwether Barometer
This index was introduced in May of 2005 to keep a pulse on the rapidly expanding housing bubble. It is comprised of stocks with a high sensitivity to the housing market, like homebuilders and mortgage finance companies. It first peaked just a few months before the top in housing prices that preceded the Great Financial Crisis. We watch this index as a leading indicator of the housing market, where a major downturn likely signals the unwinding of another housing bubble.
Investor Psychology Barometer (IIPB)
This indicator contains five complementary and historically reliable components that gauge when investor sentiment reaches either optimistic exuberance or pessimistic gloom. When the indicator reaches a reading of extreme optimism, it typically precedes a market consolidation or a bear market. Conversely, a reading of extreme pessimism indicates that selling pressures are nearing exhaustion and that a buying opportunity is likely at hand. To use this indicator: wait for a trend reversal, look at other indicators for context, and keep in mind that sentiment never peaks or bottoms at the same level twice.
Negative Leadership Composite (NLC)
The Negative Leadership Composite is one of InvesTech’s keystone indicators. This two-part indicator acts as a Swiss Army Knife —with technical tools for any situation. The Selling Vacuum component signals a lack of selling pressures, acting as a bullish signal. We use the +20, +40, and +60 thresholds to determine the strength of the signal, which often corresponds to the length and strength of the following bull market. The Distribution component signals a strong presence of downside leadership, indicating that investors are increasingly willing to sell stocks at a loss. This is a bearish signal. We use the -50 and -100 thresholds to determine the level of risk for the market.
Pressure Factor
This index is different from many others we look at, as it is not for long-term market conditions but instead looks at short-term trading conditions. Our Pressure Factor measures the degree to which the market is overbought (stock prices have climbed too far too fast, with too much volume in too few stocks), or oversold (the opposite of overbought). Readings below -30 are defined as being moderately oversold and readings above +30 are defined as being moderately overbought. Moderate readings typically carry very near-term consequences and are useful for making tactical trades. Since markets can often reach an extreme overbought/oversold level (+60/-60), the Pressure Factor should be used as a trigger when it exits these regions. In other words… the time to purchase stocks is not when the Pressure Factor enters the oversold region, but rather after it bottoms and exits the oversold region. Conversely, the time to sell a stock is when the Pressure Factor exits the overbought region.
Technical Indicators
Up-to-date graphs of these indicators are available on the InvesTech Indicators page.
Coppock Guide
The Coppock Guide is an incredibly valuable tool for identifying “best buy” opportunities. To use the indicator, watch for it to drop below zero and then turn up at least two-points, signaling a buying opportunity. As with all indicators, it is not 100% accurate and it is essential to view buy signals in the context of the overarching market risks surrounding them.
Margin Debt
Margin Debt is the amount of money borrowed by investors to buy stocks on margin, and it can be a historically relevant indicator when looked at as a percent of nominal GDP. This effectively measures leverage and excesses in the stock market. The level and trend in margin debt is very important, but so is its rate of change. Parabolic rises in this measure inherently accompany periods of strong returns; yet they are also indicative of a high degree of equity market risk and have thus historically preceded major bear markets. However, it is only a steep decline in margin debt which signals that a market top is likely in place, as many speculators are likely being forced to unwind their leveraged positions.