Have Leading Indicators Quit Leading?

Since energy traders lack the crucial investment advantages of omniscience and foreknowledge, reliance is heavy on leading indicators to discern directional tendencies of energy futures. Lagging indicators, such as employment data, in times past were largely ignored as not providing valuable data as to future market price trends. It seems, "the times they are a changin".

One of the most closely watched leading indicators, The Institute of Supply Management's Manufaturing Report on Business, gives traders a clear understanding of the actual health of the economy. When January's report was released on Tuesday of this week showing six consecutive months of manufacturing growth and the overall economy growing for a ninth consecutive month, energy futures surged higher. Then on Thursday, weekly employment data showed a slight decline in employment, raising fears that Friday's all important monthly jobs report would post worse than expected. Crude and the products quickly sold off. When the actual report was released on Friday crude fell all the way to its major support level of 69.54. The stock market also fell hard on the release of this lagging indicator.

Granted, much of the reason for the sell off was technically driven, with the catalyst of a falling euro. However, the fundamental recovery depicted by the key leading indicators ISM, GDP, and Leading Economic Index, all clearly reveal the future is brighter. Traders need to be careful on placing too much emphasis on weaker than expected employment lagging indicator data.

A few other leading indicators that successful energy traders monitor are pointing to solid economic recovery. The American Trucking Association's Truck Tonnage Index has been on a steady increase and is now at the highs of April 2008. The Baltic Dry Index also has risen from the depths of 645 in April 2008 to its current level of 2,685.

The leading indicators are showing we are in a jobless recovery. Fortunately for traders profitable trades abound whether the market is trending higher or lower. Reading the tea leaves of the leading indicators, contract size should be raised on long positions as the higher probability set up.
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