Analysing the Markets

A major criticism of technical analysis is that it only considers price movements, ignoring the fundamental factors of the company. However, technical analysis assumes that an asset’s price reflects everything that has affected or could affect the company, including fundamental factors, so these do not need to be considered separately.

Another important aspect in technical analysis is that history tends to repeat itself, primarily in terms of price movement. The repetitive nature of price movements is attributed to the fact that market participants tend to provide a consistent reaction to similar market stimuli over time.

In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to move in the same direction as an already established trend than to be against it.

• Business Inventories - an important indicator of the near-term direction of production activity. Rising inventories can be an indication of business optimism that sales will be growing in the coming months. By looking at the ratio of inventories to sales, investors can see whether production demands will expand or contract in the near future.
• Chain Stores Sales - an indicator of retail sales and consumer spending results. This is valuable information as consumer spending accounts for two-thirds of the economy. Sales are reported as a change from the same month a year ago.
• Consumer Confidence - surveys of consumer attitudes concerning both the present situation as well as expectations regarding economic conditions conducted by The Conference Board and the University of Michigan. The level of consumer confidence is directly related to the strength of consumer spending. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend.
• Consumer Price Index (CPI) - measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation. The CPI is the most followed indicator of inflation in the United States. By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.
• Personal Income - value of income received from all sources by individuals. Income gives households the power to spend which in turn aids the growth of the economy.
• Retail Sales - measure the total receipts at stores that sell durable and nondurable goods. Retail sales not only give a sense of the big picture, but also the trends among different types of retailers. These trends help investors spot specific investment opportunities, without having to wait for company reports.
• Retail Prices Index (RPI) - the UK’s principal measure of consumer price inflation, published monthly. It is defined as an average measure of change in the prices of goods and services brought for the purpose of consumption by the vast majority of households in the UK. RPI includes data on food and drink, tobacco, housing, household goods and services, personal goods and services, transport fares, motoring costs, clothing and leisure goods and services. Wage agreements, pensions and change in benefit levels are often linked directly to the RPI.

• Gross Domestic Product (GDP) - the sum of all goods and services produced by domestic or foreign companies. GDP indicates the pace at which a country’s economy is growing or shrinking and is considered the broadest indicator of economic output. The economy usually dictates how investments will perform. GDP components like consumer spending, business and residential investments and inflation indexes illuminate the economy’s undercurrents, which can translate to investment opportunities.
• IFO Business Climate in Industry & Trade - an early indicator for economic development in Germany. Every month the IFO Institute surveys more than 7,000 enterprises in west and east Germany on their appraisals of the business situation and their expectations for the next six months. The replies are weighted according to the importance of the industry.
• Leading Indicators – index of ten economic indicators that typically lead overall economic activity. This is designed to predict turning points in the economy such as recessions and recoveries.
• Money Supply - measure of the money supply by degree of liquidity, which indicates the thrust of monetary policy as well as the outlook for economic activity and inflationary pressures.

• Jobless Claims - weekly compilation of the number of individuals who filed for unemployment insurance for the first time. Jobless claims are an easy way to gauge the strength of the job market, which reflects on the economy. Jobs provide an income which gives a household spending power. The lower the number of unemployment claims, the stronger the job market is, and vice versa.
• Unemployment Rate - percentage of employable people actively seeking work according to the Bureau of Labor Statistics. About 4% - 6% is considered healthy. Lower rates are seen as inflationary due to the upward pressure on salaries; higher rates threaten a decrease in consumer spending.
• Non-farm Payroll - counts the number of paid employees working part-time and full-time in the nation’s business and government establishments. This economic report influences the markets, giving the most comprehensive report on how many people are looking for jobs, how many have them, what they’re getting paid and how many hours they are working. These numbers provide an accurate indicator of the current state and future direction of the economy.

People have to be feeling confident in their own financial position to buy a house. Trends in the home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies. Housing figures therefore indicate the demand for housing, the outlook for the construction industry and the general economic momentum.

They include:

1. New home sales - number of newly constructed homes with a committed sale during the month
2. Existing home sales - number of previously constructed homes with a closed sale during the month
3. Housing starts - number of residential units on which construction is begun each month

Construction Spending - the value of the new construction activity on residential, non-residential and public projects. Businesses only put money into construction of new factories or offices when they are confident that demand is strong enough to justify the expansion. The same goes for individuals investing in a home.

• Current Account - measure of the country’s international trade balance in goods, services and unilateral transfers. Trade with foreign countries holds clues to economic trends in America and abroad. The data can directly impact all the financial markets, but especially the foreign exchange value of the dollar.
• Import & Export Prices - the prices of goods that are brought in the United States but produced abroad and the prices of goods sold abroad but produced domestically. Changes in import and export prices are a valuable gauge of inflation in America and abroad, and the data can directly impact the financial markets.
• International Trade - measures the value of imports and exports of goods and services. Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends. The data can directly impact all the financial markets, and especially the foreign exchange value of the dollar. This report gives a breakdown of US trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally.
• Trade Balance - the difference between the value of the goods and services that a country exports and the value of the goods and services that it imports. It covers trade in products such as manufactured goods, raw materials and agricultural goods, as well as travel and transportation. For industries that rely heavily on exports, like the auto sector, a positive balance of trade may reflect a higher international demand, which can mean more jobs in that industry.

• APICS Survey - gives a detailed look at the manufacturing sector and indicates trends in production. Since manufacturing is a major sector of the economy, investors can get a feel for the general economic backdrop for various investments. An index level of 50 means no growth, while every 10 points signals gains of 4% in manufacturing.
• Factory Orders - level of new orders for manufacturing goods. The data shows how busy factories will be in coming months as manufacturers work to fill those orders. This report reveals the demand for hard goods such as refrigerators and cars, as well as nondurables such as cigarettes and clothing. It is a useful resource for investors given the influence of the manufacturing sector on the economy and investments.
• Industrial production and capacity utilisation – a measure of the physical output of the nation’s factories, mines and utilities, which reflects the usage of available resources. The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures.
• Institute for Supply Management (ISM) – an index of national manufacturing conditions. Readings above 50% indicate an expanding factory sector. By tracking economic data like the ISM, investors will know what the economic backdrop is for the various markets. The Federal Reserve keeps a close watch on this report, which helps it to determine the direction of interest rates when inflation signals appear.
• Philadelphia Fed Survey - index of manufacturing conditions within the Philadelphia Federal Reserve district. This survey is widely followed as an indicator of manufacturing sector trends since it is correlated with the ISM survey and the index of industrial production.
• Durable Goods Order - new orders placed with domestic manufacturers for the immediate and future delivery of factory hard goods. This indicates how busy factories will be in the months to come, and gives an insight into the demand for items like refrigerators and cars, and also business investment going forward.
• Purchasing Managers Index (PMI) – monthly index of national manufacturing conditions produced by the Institute for Supply Management. This is constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.
• Producer Price Index (PPI) - measure of the average price level for a fixed basket of capital and consumer goods paid by producers. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The relationship between inflation and interest rates is the key to understanding how the PPI influences the markets and your investments.