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How lead indicators help you understand market trend

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Financial markets live in the morrow. Today’s prices are a function of tomorrow’s profits. Your past performance is no guarantee for the future. It is all about the data that highlights the future ahead.

The purchase managers’ index or PMI, announced every month, gives a sense of the level of spending ahead by businesses. It is a number to which stock markets in most countries react as it unveils expansion or contraction in factories.

Similarly, several forward-looking consumer spending surveys give insight into the household expenditure that would drive business sales and profits. The Reserve Bank of India does many surveys from consumers and professional forecasters every quarter. They predict household spending that leads to an increase in consumption. Professional forecasters give their outlook on growth and inflation. RBI uses these inputs to analyse prices and determine the direction of the interest rates. When a credit policy statement is announced, markets are keen to hear the outlook from central bankers. When the US Federal Reserve chairman says that more rate hikes are on the way, global markets go into a tizzy. While they anticipate and pencil in a rate hike, any deviation from expectations in the outlook triggers a reaction.

Listed companies announce quarterly results and hint at the outlook for growth and profits in earnings calls. Analysts are often skimming for information that hints at the impact on future profits. Any forward-looking statement by corporate management is analysed from that lens.

Market volatility

A high volatility index or VIX usually accompanies a fall in equity prices. A new paper published by the RBI studies the impact of implied volatility on the market’s direction. According to the paper, the implied volatility index is a measure of volatility perceived by traders over the short term. The index is an indicator of the anticipated fluctuation of the market and is based on the order of the underlying NSE Nifty options.

The study finds some occasional deviation from that trend. On some occasions, volatility and equity prices moved in the same direction. That means some traders saw buying opportunities in situations of rising volatility. The RBI working paper finds that the India VIX and the Nifty 50 moved in the same direction 32% of the time. That indicates a predominantly inverse relationship. However, it is much higher than the US’s 19% of the CBOE VIX and S&P 500.

You need to understand the implication of being a trader and an investor. A trader relishes volatility. As share prices fluctuate sharply, traders can make money buying and selling stocks.

For those who are financially aware, tracking lead indicators is a routine. These are active investors or traders. However, if you are not into finance but wish to benefit, your plan should be to work through experts who know about these lead indicators. They can act on your behalf in the stock market. They manage the risk for you.

If you are new to investing, you must take professional help to identify the right investments. Diversifying through appropriate asset allocation is the ideal way to protect yourself against market volatility and risks. Alphaniti can assist you if you want to secure your financial future through our newly launched ETF Corner where you can also create SIPs now and discover our alphamatters and alphastrategies. Do check them at!

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