Trolling the StockCharts Economic Database for Useful Stock Market Indicators

Many of you may be unaware of the fact that StockCharts has a small database of economic indicators. (You can find them by searching for symbols that begin with $$.) This week, I ran through a number of series to see if any could be useful from a long-term stock market timing point of view. This article summarizes my findings.

New Homes Sold

The stock market generally leads the economy, and the lead sector of the economy is the highly interest-sensitive housing market. Based on that connection, it is not unreasonable to expect new-homes-sold data be closely tied to movements in the S&P. In that respect, Chart 1 compares these two series.

At first glance, there does not appear to be much of a connection between them. On the other hand, if a long-term KST, MACD or other long-term smoothed oscillator is calculated from the raw data, far better results are returned. The arrows in Chart 1, for instance, approximate the KST buy signals for new homes sold that have developed at or below zero since the 1960s. All, except for the (dashed) 1981 and 2001 signals, were followed by some kind of stock market rally. Recently, the KST triggered another buy signal. I realize that it's not a freshly minted one. However, based on the rally length following previous signals, it would not be unrealistic to expect the market to extend its recent gains.

I also looked at the KST peaks to see whether they were helpful in generating sell signals. However, Chart 2 shows that most reversals developed far too way in advance of forthcoming equity peaks to be of any practical use.

University of Michigan Sentiment

The University of Michigan has published data reflecting consumer sentiment since the late 1970s. This series is compared to the S&P Composite in Chart 3. Once again, the trajectories and the jagged nature of the sentiment numbers mean that they are not very helpful in isolating primary trend turning points for equities. For example, just try to track stock market movements triggered by 12-month MA crossovers in the raw Michigan numbers. I can count 6 such whipsaws in the 2016-2020 period alone. On the other hand, the arrows show that KST buy signals from at or below zero offer a far better solution. It's worth watching right now because the KST has just triggered another buy signal. Moreover, the Index itself has just started breaking out from a small base.

A point worth noting about the actual numbers and the KST is that both are currently depressed. That level of confidence is more consistent with an emergence from a recession or bear market than a recovery and bull market that has been underway for many months. It provides us with a reminder that, whilst there are pockets of excessive optimism and speculation in some market segments, the general public remains in a relatively cautious mode.  That in itself suggests great potential for a stronger and durable recovery. Since stock price movements are almost always tied to economic swings, they should benefit too.

OECD Consumer Confidence

A fairly recent addition to the economic database is the OECD Consumer Confidence Indicator for the US. Its action is very similar to the Michigan Consumer Sentiment numbers, but its historic record extends back further. It is also slightly less volatile. Incorporating the OECD data into the analysis is an additional plus, as it can act as a confirmation of the Michigan survey.

Once again, reversals in long-term smoothed momentum trigger buy signals for equities. Previous examples have again been flagged by the arrows. The solid ones reflect valid instances; the two dashed ones, false positives. The indicator is of particular interest right now because the KST has started to turn up and is right at its MA. Equally important is the fact that it is reversing from the green dashed overstretched line for the fifth time since the 1970s. Only one instance, in 2001, was not followed by an immediate equity advance. The indicator itself is still in a downtrend because it is below its 12-month MA. However, the distance between the February data and the MA is extremely small.

I'd like to wrap up with two points. First, if you are interested in following these charts, simply click on them. When new data is available, they will instantly update. Second, the housing and sentiment may be bullish for the long-term, but certainly does not preclude occasional and unexpected countertrend corrections.

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.