Comment: The Predictive Content of Some Leading Economic Indicators for Future Stock Prices

Extract

Professors Heathcotte and Apilado investigate a mechanical stock market trading rule which attempts to exploit the implications for market short-run price action contained in the leading indicators of business cycles found on the NBER 1966 Short List. The authors note that, in approaching peaks of business cycles, turns in all of the other leading indicators on the List except corporate profits occur before turns in the Standard and Poor's 500 Common Stock Index. Virtually the opposite is true relative to cyclical troughs, i.e., they nearly all lag the Index. The authors generalize, therefore, that turns in composite or diffusion indices constructed of the leading indicators might provide profitable signals to take appropriate positions (long or short) in the Standard and Poor's 500 stocks.