Economic Noise and the S&P500

Economic Noise and the S&P500
This post looks at a curious and obscure indicator on the US economy which has in the past provided some clues on the outlook for the US stock market. I call the indicator the “Economic Noise Index” and it combines the signals from the Citi Economic Surprise Indexes and the Economic Policy Uncertainty Indexes (inverted), using z-scores to standardize the series. The result is an indicator which reflects the amount of noise and whether it is positive noise or negative noise.
For instance, if the economic policy uncertainty index is very high (which would be low on the chart because I invert it to produce a consistent signal) and the economic surprise index has fallen very low, it would reflect an environment where there is heavy noise with a distinct negative hue. Of course, most astute readers would immediately realize that this is basically like a sentiment index, maybe economic sentiment, and hence sharp and loud negative readings are probably contrarian signals that should be bought – and that is precisely the experience we’ve noticed on the chart.

Get The REITs eBook in PDF

Get our PDF study on REITs and our other investor studies! Save it to your desktop, read it on your tablet, or email to your colleagues.

It works better at picking bottoms than tops, but can still be very informative on picking selloffs and turning points. Rather than just going against high readings (which results in a number of false positives... or is that false negatives?), the better course is to look for high levels of positive noise, and then wait for the indicator to rollover or turn down e.g. as in 2008, 2010, 2011. At present the index is at strong positive noise levels, so the next step is to watch for it to rollover - we will be watching this one closely!
The US Economic Noise Index has hit strong positive levels, consistent with the rally in the S&P500, but at this point it is on watch for any signs of rolling over (not yet).

Looking at the components of the indicator, you can see the strength is coming from the economic surprise index, yet policy uncertainty is rising (bad noise), which is understandable and to be fair is probably the most likely source or catalyst of any potential selloff or correction.


For more and deeper insights on global economics and asset allocation, and some more good charts you may want to subscribe to the Weekly Macro Themes. Click through for free look or a trial.
According To Jim Chanos, This Is The Biggest Story No One Is Talking About

Jim ChanosWhen a liquidity crisis struck China's Evergrande Group in the summer of 2021, it shook the global markets. Debt payments by China's second-largest property developer by sales were estimated in the hundreds of billions of dollars, and the company missed several payments. Those missed payments led to downgrades by international ratings agencies, but the Chinese Read More

Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.
Previous article Bitcoin Not The Only Bubble Around
Next article The New Risk Management Normal In EM Investing

No posts to display