When you are evaluating potential stock picks, knowing how to spot a valuable indicator of future activity or value can make the difference between winning and losing trades. Interestingly, some of the most important indicators relate to economic activity occurring completely outside of the stock market entirely. Interest rates, unemployment rates and the relative strength index, or RSI, are three leading indicators that can help you assess whether or not it is the right time to enter the marketplace.
Interest rates, the relative strength index and unemployment rates are all popular leading indicators for stocks.
Considering Interest Rates
Interest rates are one of the most often discussed indicators in today's domestic economy. The reason for this is relatively straightforward. As the Federal Reserve raises interest rates – or the cost of borrowing money – banks and other lenders raise their interest rates for consumer lending in turn. Because of this, it is quite common for entrepreneurs and small business owners to hesitate before taking out large business loans.
Consequently, growth rates across the domestic economy may stagnate slightly. On the other side of the spectrum, reduced interest rates often lead to increased incentives for borrowing, which catalyzes growth and helps bolster the economy. This is especially helpful in times of economic stagnation or recession.
Considering Unemployment Rates
The relationship between unemployment rates and stock market activity is quite transparent. A higher unemployment rate implies that an increasingly large percentage of working-age adults are removed from the workforce. Because of this, consumer spending is likely to reduce.
When consumer spending levels decrease, it is quite common for business revenue nationwide to fall. With that in mind, increasing unemployment rates are often met with sharp selloffs in the stock market. When unemployment rates fall, the stock market will typically experience a surge in investment funds.
Exploring the Relative Strength Index
Developed by Welles Wilder, the relative strength index – or RSI – is used to depict the current momentum of the stock market and is derived from calculations relating to recent gains or losses occurring within the marketplace. A designated time frame is established, and the number of gains and losses sustained by a given stock are used as part of a larger calculation to determine whether or not the stock is oversold or overbought at the moment.
This information can be particularly valuable during times of market volatility. If you are debating whether or not it is the right time to invest in a stock, the RSI may provide some insight as to what the next likely market activity will be.
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