Key Stock Market Indicators Pointing to Higher Prices

Pinnacle Digest writes: Clif Droke explains how last week’s surge in equity values, a period which saw new all-time highs hit for several S&P stocks, reiterates that the 3.5 year recovery is still alive. And as is the case with any typical bull-market, they last about four years. This means we are getting very close to the market peak which Droke has consistently reminded readers of.  


In his latest article, Clif Droke explains that we should be watching for specific signs in the market and he provides a few key stock market indicators to monitor.


Key Market Indicators:

Internal Momentum: Clif Droke believes this is the best measure of demand for stocks. He states that “Internal momentum is important because it tends to precede the direction of stock prices, i.e. if internal momentum starts rising while stock prices are falling, it’s usually only a matter of time before stock prices turn around and follow the lead of internal momentum.  Conversely, when internal momentum is declining while stock prices are rising, this divergence usually results in stock prices plunging at some point since internal momentum almost always leads stock prices.” Droke provides the chart below documenting the NYSE internal momentum. Right now it appears internal momentum is favoring a continued rally, but Droke wants readers to stay nimble as that could change quickly.

External Momentum: External Market Momentum is looking quite strong right now as 15, 30 and 60 day moving averages continue to establish themselves at higher levels. While Droke believes this to be the weakest predictor of future performance, the charts remain bullish for the short-term.


The New Economy Index: “The New Economy Index (NEI) reflects the market performance of the most critical U.S. consumer retailers and business service providers and is an excellent measure of the strength or weakness of the domestic retail economy” stated Droke. He believes the New Economy Index gives analysts a real-time picture of what is happening in the US business economy. And unlike government statistics, the NEI doesn’t lag two to three weeks behind. He explains in simple terms that the New Economy Index is an average of the weekly stock prices of the leading components of the U.S. economy: online and bricks-and-mortar retail sales, transportation, employment, full-service consumer sales, etc.  The stock price of the leaders in each of these sectors is averaged to give the weekly NEI reading. This is a very important index to constantly review as you look to predict short-term changes in the American economy and stock market. While Droke doesn’t believe it is a fantastic leading market forecaster for long-term future activity, it is the best real-time gauge as the NEI almost always coincides with a top or bottom in the stock market. And despite the NEI making a new all-time high at the end of August, it isn’t showing that we are currently at a top in the market. Droke believes this is an index the Fed watches very closely. The NEI hasn’t provided a market bottom signal since 2010 ( around the last time we saw a round of QE).


New Economy Index below:



Another key point to consider from Clif Droke’s latest article is that right now, among investors and the media, there is almost an even 33% division between the bulls and bears (with the remainder undecided). This is not the kind of reading you get when a market bottom is being set or a market top. For a market top, as an example, the vast majority of investors and media members are bullish, while the opposite is true for market bottoms. Although we are getting very close to the end of the four year cycle, Droke believes that “Only if the key indicators reverse in the next several days will we have to worry about a premature peak for the stock market.”


Click here to read Clif Droke’s full article.