Market prediction based on macroeconomic indicators - page 61
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The indicators depend on the industry, for example for services - profitability, but for production I would look at changes in finished goods inventories and work in progress, and stock renewal.
That is the point, it seems that all indicators are in sight, but in fact they are indicative. We do not have to go far. Compare nonfarm's current and previous indicators and you will find it painful to look into the future.
I need to apologise for not explaining that there is nothing left of what was written on the first page in the strategy. The task there was to predict GDP and with it recessions and market behaviour. The problem with that method is that GDP fluctuates just like the market price, often for no apparent reason. For example, the department was late with its data and they announced the GDP, and then they corrected it for months. Often they also change the calculation methods. Natural elements leave their mark. A few years ago, because of the lack of a government balance sheet, many economic indicators stopped being updated at all. If you make a GDP model as described on the first page, by a linear combination of even 10 indicators, it leads to a high sensitivity of this model to unimportant fluctuations and data quality. This in turn leads to prediction errors.
In the end I decided to limit my predictions to recessions and not the whole GDP behaviour with its quarterly fluctuations. This allowed me to limit myself to just two indicators. Predicting recessions and when to sell the S&P500 using these two indicators is not that difficult. Much more difficult is choosing when to close a short position and when to switch to a long position. These two indicators give a premature signal to go long. A third indicator was needed. But still the quality of the long entry signal leaves much to be desired.