ISM index

For the past few months, the ISM index released at the beginning of each month seems seldom fail the market. Similarly Chinese PMI is doing well too. (Chinese PMI is always out before the US ISM index) ISM is definitely an important economic indicator.

The book I put on the left of the post is worth reading even though it's kinda dry and boring. It does help to understand more of economic indicators.

S&P 500 and US dollar index

The negative correlation between S&P 500 and US dollar index is super strong.

Bonds and Equity

Yield curve is a powerful tool but I doubt most people can use it well. I put up a book link at the left of this post I think you really check it out.

I just read Bloomberg's post about 30 year treasury bonds's yield increase recently and I thought you might want to read it too. "U.S. 30-Year Yields Rise Most in 14 Months on Inflation Outlook"
http://noir.bloomberg.com/apps/news?pid=20601010&sid=aq54XNlW_rBg

How do you manage your 401K? Well, most people know they should allocate their assets between bonds and equity. And they know as time pass by the weight of bond and equity should be adjusted for more conservativeness. I do think it's still right for most mutual fund investors and who really don't have time to think about what's happening in the market. However, if you want to be a little more active you have to know more about both bonds and equity market.

What I put together here are few graphs about  T-bonds yield and S&P 500. The first graph shows the five year time period. The second one covers rough recent three months periods. The last one demonstrates the yield curves for the past few months and corresponding S&P 500 value.

Recently before September the 10 year yield has a pretty good positive correlation with S&P500. When you think about people with mutual funds shuffle their money out of equity to bonds it would make sense for you.   However, after the first week of September, when Feds' Biege Book was out (9/8) and further confirmation from FOMC rate decision meeting came out for Quantitative Easing 2 (QE2) you can see both stock market and bond market started booming. Investors are just very happy about the potential of Fed print more money. And for past few days, the bond yield starts to go back up (price falls) and it seems that fear of the inflation risk kicks in, especially after Friday's better than expected retail sales growth and Thursday's higher Producer Price Index (PPI).

Now despite the low yield rate, the yield curve is in its normal shape. To see some crazy yield curves, go to the next link. http://www.stockcharts.com/charts/YieldCurve.html (move the red line on S&P500 to see updated yield curve)

Economic Events and Market Reactions

These tables are based on Yahoo weekly economic event calendar. Put/call ratios, S&P500 volatility chang%, and 10yr treasure bond yield change % and S&P500 are recorded as market reaction. There are of course other market indicators to watch but for now these are the ones I use to understand the market and how they digest the economic releases.

August, 2010

September, 2010

Important economic indicators

From "Secrets of Economic Indicators...""
Coming up this week: employment situation and ISM.

Correlation between weekly initial jobless claim and Dow

Weekly initial jobless claim has been showing great correlation with equity market. In the following graph, seasonal adjusted weekly initial jobless claim is plotted together with Dow jones industrial average index. For the most recent three years, the correlation between the two is about -0.93. A very good indicator for the market so far.

400K is a crucial level below which economists would think less possibility of recession. So far the level is high around 470K and the four week moving average is tilting up.  (data is updated till 8/26/2010)

Relationship between GDP % change and Dow Jones Industrial Average

I put quarterly US GDP change percentage together with Dow index. DOW's data is based on the second estimate dates of US GDP. For example, today the government released the second estimate of US GDP increase at 1.6% for Q2 from previous quarter. And the Dow closed at 10150.65. And keep in mind there are around 90 days between two data points.

The correlation is strong during 2008～2009 period. Right now US economy starts to show sign of slowing down economy. It will be interesting to see how the equity market perform in the following quarters.