Who's afraid of the index of leading indicators?

05/20/2010 12:49 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

I don’t put much stock in the Conference Board’s Index of Leading Indicators. Seven out of 10 of the indicators are actually economic data—the Commerce Department released building permit data, for example, on Tuesday, May 18 —that were published before the index was released and that have already been factored into economists’ forecasts and stock prices.

In other words, what’s leading about this index?

But when the market is in a receptive mood and is looking for confirmation of its up or down trend, the index can be psychologically powerful. And that’s what happened this morning when a negative reading on the index—it fell by 0.1% when the consensus was looking for a positive 0.2% --confirmed investors’ worries about the U.S. economy. (It certainly didn’t help market psychology that initial claims for unemployment for the week that ended on May 15 came in significantly above consensus.)

The leading indicators index is falling so the U.S. economy is slowing and could even be headed into a double dip recession, just as the market fears in its worst nightmares.

That may be true—although I doubt it—but you sure can’t prove it from this index.

But let me give you my own leading indicator—on the index of leading indicators: It’s going to fall again when the May reading is announced in June.

That’s because the backwards looking index of leading indicators uses stock prices and initial claims for unemployment as two of its ten factors.

From today’s numbers we know that initial claims for unemployment rose to 471,000 for the week that ended on May 15. That’s up from 446,000 for the week that ended on May 8. My fearless prediction: initial claims for unemployment for the week that ended on May 15 will still be up when they get factored into the index of leading indicators when the May report is issued in June.

My equally fearless prediction: when the index factors May stock prices into the numbers for the June release, May stock prices will still indicate a stock market correction.

In other words, right now the odds are extremely good that the May index of leading indicators will be down again when it’s released in June.

But then we already know that, don’t we?

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