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MEMBER FEATURE STORY
on
Predicting
Unsplash
the Stock
Market Is
Easier
Than You
Think
These economic
indicators will help you
anticipate the future
economy
Concoda Follow
Sep 2 · 9 min read
E
ven if you don’t trade stocks for a living, or have any nancial background
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whatsoever, being able to predict the future economy can be a huge bene t to
your nancial situation. Real estate can be sold at its highs, money can be drawn
from mutual funds that are expected to rise inde nitely, and when things start to go bad,
moving capital into tangible assets such as gold is a boon.
This article aims to give market outsiders a no-nonsense four-step guide to successfully
predicting the health of the economy consistently over time.
. . .
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These warnings don’t really solve the problem, and have been about as e ective as GDPR
cookie compliance (i.e. they have virtually no e ect whatsoever). If anything, the broker
is just fueling the potential client’s desire to beat the odds: “Are you are one of the 21
percent?”
It is also becoming increasingly di cult for traders to beat the market due to the rise of
“algo trading” (the use of computer algorithms), a strategy that virtually eliminates any
chance for mere mortals to make money trading on a short-term basis. If you have ever
tried trading a company’s earnings the market will have moved before you had a chance
to react (as the below graph demonstrates).
Day trading is now the least pro table way to trade, as only advanced supercomputers can
now bene t from world news and company earnings. A trading oor no longer has 200+
sweaty middle-aged men throwing their hands up in the air like Hollywood wants you to
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believe; they have been replaced by machines implementing nancial arti cial
intelligence, commonly known as FinTech.
So why do people still think day trading will make them rich? This can be explained by
the fact that day trading is widely advertised as an e ective strategy by the mainstream
brokerage industry and nancial media. Once it is shoved down retail traders’ throats,
they cave in to the constant propaganda and lose money quickly by sticking to
unpro table strategies whilst utilizing the “education” o ered by the brokers, which is
code for “learn how to give me all your money in the fastest way possible.”
Day trading is now the lea pro table way to trade, as only
advanced supercomputers can now bene t from world news and
company earnings.
The entire industry is based on suckering desperate individuals into a false narrative.
They say it is easy to make money—all you have to do is trade on charts with no
fundamentals and you’ll be sitting on a beach sipping a piña colada in no time. But let’s
ask the obvious question here: If trading were that easy, why isn’t everybody doing it?
The truth is it’s almost impossible to make money if you are a retail trader; the small
percentage of people who do succeed have had su cient training and education.
Realising you are stepping into a nancial matrix where everything being thrown at you
forces you to lose money instead of gain, is the rst step required to making informed
decisions.
Since the smart money are analysing the same data and following the same indicators, a
smart money herd mentality is created. The internet allows outsiders to get a glimpse of
that mentality—to predict what the smart money are doing and what position they may
take on a certain asset.
The CFTC (Commodity Futures Trading Commission), for instance, records smart money
transactions in the nancial markets using their weekly Commitments of Traders report.
Below is a graph of eurodollar futures traded on the CFTC exchange. The white line on
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the graph below shows us that institutions are positioned net long the euro (that is, most
people are buying) and net short the U.S. dollar (most people are selling). However, the
number is decreasing, showing that money has been owing from the euro into the dollar
over the past year.
Now that we have identi ed that institutional investors have a herd mentality, we need to
know how they come to the conclusion that the U.S. dollar is favored over the euro. The
problem outsiders have when learning how markets really work is gaining the correct
information about what drives the economy in the rst place. The markets are forward-
looking: the price you see is a re ection of what the market thinks the price will be six to
12 months in the future rather than in the present day. When it comes to the stock market,
gross domestic product (GDP) is the benchmark for global growth and contraction.
Therefore, being able to predict movements in GDP is the key to predicting stock market
moves.
How do you predict GDP, you ask? The answer is leading economic indicators. You may
have heard that term before, but you might not have been introduced to the most
powerful indicators that are used by smart money who consistently predict market moves
before the dumb money herd. If we can identify the leading indicators of GDP, then we
can accurately predict future moves in GDP and therefore the stock market.
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The ISM has over 90 percent correlation with real U.S. GDP growth.
Using the last 70 years’ worth of data we can create a key that allows us to predict GDP
based on the ISM’s trend line:
With a six to 12 month time lag on GDP the correlation is staggering. And the fact that the
lag exists is what allows professionals to accurately predict the stock market consistently
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over time. The nancial media are aware of the ISM but barely dedicate any time in
covering the true power of this leading indicator. It doesn’t matter what stock you are
trading: the ISM will have some in uence over that stock price.
The ISM’s amazing accuracy can partly be explained by the professional trader herd
theory: institutions such as investment banks and hedge funds implement the same
overall strategy but employ their own unique variations. You can almost guarantee that
the ISM is an important part of a professional’s process when generating ideas and
forming a global view on the world economy.
Here are examples of the ISM mirroring the stock price and therefore predicting the
nancial health and performance of well-known companies.
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Apple (AAPL)
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JPM, just like other leading indicators, predicting the last two recessions
Building permits
The second-most powerful and widely misunderstood indicator is the U.S. building
permits index. Why would that be? It turns out that building permits aren’t just a
planning application: they involve a payment made to the government. They aren’t free! If
builders aren’t willing to pay for the application in the rst place, this indicates that there
is a decrease in demand for housing and that businesses are holding back on spending.
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Plus, to build a house you need a large amount of capital. The vast majority of
homebuilders use debt to nance the building of a house in the form of a mortgage. If
banks and other lenders aren’t willing to lend, then the total number of permits will
decrease—hence they act as a barometer of nancial health. The wellbeing of the housing
sector relies on the availability of credit in the system. The ability or inability of banks to
issue a consistent supply of loans gives us a great insight into the health of the overall
economy.
Using the data we have obtained we can come to the conclusion that the U.S. economy is
still growing but at a much slower rate than in previous months. As a result, smart money
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will eventually react as institutions will use this hypothesis to anticipate a global economic
slowdown and short the U.S. market. (Hint: it’s already happening, check below!)
Smart money that are reducing their long positions are almost net short!
We are already seeing this in China and Europe as their stock markets start to tank and
move towards negative GDP growth. But will the U.S. follow suit? It’s looking that way. In
a year or two we could be on the verge of a recessionary period in the economy. However,
it’s always good to wait for a few readings before changing your bias: future readings may
reverse and hey, presto, an even longer bull market in the U.S.!
. . .
Last Word
I hope you can see now that having a view on the global economy is easy once you know
what drives markets and can anticipate what is to come in the future. Once you realize
how the system works and can operate within it, it starts to make complete sense. I
encourage you to do some further reading on the material covered in this article, and to
explore further how this information can be useful in your future nancial decision-
making.
Good luck! If you have any questions feel free to leave them in the comments.
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