Leading, lagging and coincident indicators

May 21, 2014   //   by Profitly   //   Features, Profitly  //  Comments Off on Leading, lagging and coincident indicators

One of the first things you’ll hear about in any sort of economics course is the different types of indicators. You may be thinking that this isn’t important for penny stock traders to know, but you would be 100% wrong. Why?

Macro economics trends impact the general direction of the stock market and the sectors within it. If you are trying to short a stock when the market is up 5% that day due to a great jobs report number, you’re chances of having a great trade are far less than if the market was down 5% due to a horrible jobs report. Even if you have the best penny stock to trade, thinking it will be a great short since it’s a horrible company, you may time it poorly if you do not pay attention to the overall economy and market. This is a big part of learning how to trade penny stocks and earn a lot of money trading penny stocks as well.

So, what are these indicators that I’m talking about? First of all, they are all free to obtain and most of the major news outlets will cover them to a certain extent. Policy making outlets like the Federal Reserve and others use these indicators to determine where the economy is headed and at what pace it is moving in that direction. The Federal Reserve even tied the unemployment rate to their bond buying and interest rate policies. The data points are each released at a specific time that does not change, such as the unemployment report coming out the first Friday of every month.

An indicator is anything that can be used to predict future financial or economic trends. I’ve talked about the unemployment rate a lot since that is probably the most well known indicator, but other examples of the most important ones according to Investopedia are: the Beige Book released at 2pm two Wednesdays before every Federal Open Market (FOMC) meeting; the Business Outlook Survey released at 12pm the third Thursday of every month; the Consumer Confidence Index (CCI) released at 10am on the last Tuesday of the month; the Consumer Credit Report released at 3pm about five weeks after the month’s end; the Consumer Price Index (CPI) released at 8:30am at mid-month; the Durable Goods Report released at 8:30am around the 20th of the month; the Employee Cost Index (ECI) released at 8:30am on the last Thursday of January, April, June and November; the Employee Situation Report released at 8:30am on the first Friday of every month; the Existing Home Sales released at 8:30am during the fourth week of the month; the Factory Orders Report released at 8:30am during the first week of the month; the Gross Domestic Product (GDP) released at 8:30am four weeks after the quarter ends and three months after the quarter ends (revised release); Housing Starts released at 8:30am on or around the 17th of the month; Industrial Production released at 9:15am on or around the 16th of the month; the Jobless Claims Report released at 8:30am on Thursdays; the Money Supply released at 4:30pm on Thursdays; Mutual Fund Flows released during market hours every month; the Non-Manufacturing Report released at 10am on the third business day of the month; Personal Income and Outlays released at 8:30am four to five weeks after the months end; the Producer Price Index (PPI) released at 8:30am during the second or third week of the month; the Productivity Report released at 8:30am approximately five weeks after the previous quarter’s end; the Purchasing Managers Index (PMI) released at 10am on the first business day of the month; the Retail Sales Report released at 8:30am on or around the 13th of the month; the Trade Balance Report released at 8:30am on or around the 19th of the month; and the Wholesale Trade Report released at 10am on or around the 9th of the month.

Wow, I bet you never knew there was that much news that could impact the market!

So, now let’s break them down between leading, lagging and coincident.

First, what is a leading indicator? These types of indicators signal future events and are typically defined as quantifiable economic factors that change before the economy starts to follow a specific trend. One basic was to think of this is referring to how a yellow traffic light indicates that the red light is coming. Leading indicators work this way, except they are not as accurate as the traffic light. Bond yields are typically considered a good leading indicator of the market. This is because traders anticipate and speculate trends in the economy which impacts bond yields. Other leading indicators include market returns, as the stock market usually begins to decline before the economy as a whole declines and usually begins to improve before the general economy begins to recover, as well as the index of consumer expectations, building permits and the money supply.

And lagging indicators? They are measurable economic factors that change after the economy has already begun to follow a specific trend. Going back to our traffic light example, think of how that same yellow light comes after the green light. Since these indicators lag the price of the asset, a significant move will largely occur before the indicator is able to provide a signal. They confirm trends, rather than signal the trends are forthcoming. Examples include the unemployment rate, corporate profits and interest rates. Think of how the unemployment rate signals that the economy has slumped in previous months and has caused employers to lay off some of their employees.

Finally, what are coincident indicators? These indicators show the current standing of economic activity. They change at the same time as the economy. Going back to the traffic light again, the green light would be a coincident indicator of the pedestrian walk signal. Examples include personal income, average weekly work hours and Gross Domestic Product (GDP).