How The Industrial Trends Orders Reveals A Future Market Behavior? by Bargain Value

Today, we are going to talk about an another market’s width indicator – Industrial Trends Orders (ITO). It is the longest-running UK private sector qualitative business tendency survey, which covers 38 sectors of UK manufacturing industry at chief executive level. The survey has been conducted on monthly and quarterly basis by the Confederation of British Industry (CBI) since 1958.

It is a leading indicator of business conditions. A level above zero indicates, that the order volume is expected to increase; a level below zero indicates, that the expectations are for the lower volumes. Nowadays, the reading is compiled from a survey of about 550 manufacturers.

In order to draw the conclusions from the level of this indicator, we should compare it with the expected one in each period. This method is used to establish, if the reading should be taken as bullish (the value higher than expected) or bearish (the value lower than expected) for the GDP. However, in our analysis we are going to examine its dynamics, which gives us an information about the value of ITO in comparison with the level one year back in time. The ratio constructed in this way, tells us how fast the value is accelerating and in which direction.

On the chart below we can see both the FTAS and industrial trends orders dynamics smoothed by a simple moving average:

Industrial Trends Orders

At the first glance, we see a lot of irregularity here and not much correlation can be found, especially in the first half of the analyzed period. However, if you take a closer look, you will see, that some dependence can be found. We are talking about a situation, when Industrial Orders dynamics reaches a level of 20 from the bottom. Why these moments are important? They indicate the situations, when industrial trends orders dynamics is starting to reach dangerously high level and as we can see, the peak are going to appear very soon after that. Once, the peak had been reached, the ITO dynamic has been starting to fall down. In theory, it should be a bad signal for the whole economy, GDP and the stock market, because it means worse prospects for the future orders among the manufacturers.

These moments are pointed out by the vertical lines, on the chart below:

Industrial Trends Orders

We have marked 9 situations and we are going to check, how the FTAS was behaving during one year period after each of them. It is presented on the chart below:

Industrial Trends Orders

During the one year after the peak, we have:

  • One extremely negative path (11.11%)
  • Five neutral paths (55.55%)
  • Three positive paths (33.33%)

As we can see, the most paths are neutral (have changed about no more, than +/- 10%). The conclusion is, that when the ITO dynamics is high, it is not a very good moment to buy stocks. There is a high probability, that we will not earn much and for most of the time, the stock market will be oscillate around the same value.

There is more. Let’s take a look on the four biggest bear markets in the last 40 years and the level of analyzed indicator at the begining of each one of them. The data are included in the table below:

Industrial Trends Orders

There are two, very visible conslucions:

  1.  At a time, when the bear market begins, the industrial trends orders level is always very high and above the value of 22,
  2. It seems, that a strong fall in the market, has a little chance to appear, if the ITO dynamics is not rising rapidly at first.

What will happen in 2016?

The current level of industrial trends orders dynamics is low ( -9 p.p.), so bearing in mind, what we have said earlier, there is a very little chance of a market fall in 2016. The present declines should be treated as a correction and the bargain for the cheaper purchases.