What Economic Indicators Reveal About the Stock Market’s Cycle Stage

Deep within the StockCharts database lies a rich collection of economic indicators that can be used to identify shifts in the primary trend for bonds, stocks, and commodities. All three asset classes are influenced, directly or indirectly, by the ebb and flow of the business cycle. In this article, I will demonstrate, with practical examples, how some of these indicators can be applied to improve trading and investing decisions for stocks. (I hope to cover bonds and commodities in a later piece.)

The first principle to understand is that these indicators are usually more informative when viewed in momentum form rather than in their raw, absolute format. Momentum highlights the underlying rhythms and cyclicality in the data, making it far easier to compare indicators and identify their peaks and troughs. I use the long‑term KST, but there is no reason why tools such as the MACD, PPO, or a stochastic oscillator, with appropriately slowed parameters, cannot be substituted.

Spotting peaks and troughs is essential because the business cycle is, at its core, a chronological sequence of events, which you can read more about here. This is the logic behind the well‑known categories of leading, coincident, and lagging indicators published by the Conference Board. Leading indicators turn ahead of the economy, coincident indicators move with it (industrial production and nonfarm payrolls being classic examples), and lagging indicators follow.

Chart 1 compares two leading indicators with a coincident one, all available in the StockCharts database. The top panel shows ISM Manufacturing New Orders, one of the earliest indicators in the economic sequence. Beneath it sits the Conference Board’s LEI, followed by Industrial Production, a coincident indicator. The green arrows connect their major lows, which generally slope to the right, illustrating the typical lead‑lag structure. The dashed green arrows highlight instances where the sequence deviated from the norm, while the red ellipses mark swings in New Orders that failed to propagate through to the LEI and Industrial Production.

Although the exact leads and lags vary from cycle to cycle, the overall chronological pattern remains remarkably consistent.

The New Orders KST bottomed in 2023, hesitated about a year ago, and has begun to improve again. Notably, this very early indicator continued to rise in March and April despite the sharp spike in energy prices. May’s data will be released next Monday. If the usual chronological sequence holds, current strength in New Orders should continue to flow through to the LEI and eventually to Industrial Production.

Chart 2 compares the KST of the Conference Board’s LEI with the S&P Composite. The underlying idea is straightforward: the stock market typically anticipates future swings in the coincident part of the economy by several months. The LEI is designed to do the same thing.

Consequently, when the LEI KST crosses above its moving average, it is signaling that economic growth is likely to strengthen well into the future. The exact lead time varies from cycle to cycle, but the green vertical lines, which mark these upside KST crossovers, have almost always been followed by higher equity prices. The two dashed lines draw attention to the only false positives since the 1960s and that the stock market is not always in alignment with the economy.

Chart 3 highlights the sell signals generated by the LEI KST. These signals have been less reliable in recent decades because the market has largely trended higher in a relatively linear fashion since the early 1980s. Most declines have taken the form of brief, contained mini‑bear markets — moves that the slow‑moving, deliberately smoothed KST is not well‑suited to capture in a timely way.

At present, the indicator remains bullish, but only marginally so. However, the improvement in the ISM New Orders KST shown in Chart 1 suggests that the LEI KST may soon begin to strengthen as well.

Chart 4 features another leading indicator available in the StockCharts database: Future Capital Spending, published by the Philadelphia Fed. The underlying polling data is quite jagged, so a 12‑month moving average has been applied to better capture the underlying trend. The vertical lines mark the MACD lows, which, by necessity, are identified with the benefit of hindsight. Even so, the alignment between these MACD troughs and subsequent economic or market turns provides useful context for evaluating the current position of the series.

Both the indicator and its MACD remain in clear uptrends, but they are now approaching overstretched territory. For the moment, it’s a case of steady as she goes, though the setup warrants close monitoring.

Chart 5 highlights the sell signals generated by the MACD peaks. As with the earlier examples, these signals have been less effective in recent decades due to the market’s predominantly linear upward bias.

Most declines have been brief and contained, limiting the MACD’s ability to flag meaningful tops. At present, there are no signs of a peak, suggesting that the current late‑cycle rally still has room to extend.

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 Group of Walnut Creek or its affiliates. The Six Stages of the Business Cycle are followed each month in Martin Pring’s Intermarket Review.