One of the major advances in market analytics has come in combining the 135 or so Dow Jones U.S. Sector Indexes with various forms of independent research. This is really cool, because it offers unprecedented insight into which segments of the U.S. economy are experiencing capital inflows and which are experiencing capital outflows. In other words, where is capital going?
We use a pretty simple trend analysis algorithm that measures historic price trends for each Dow Jones U.S. Sector Index, such as the Dow Jones U.S. Aerospace & Defense Index (^DJUSAE) or the Dow Jones U.S. Apparel Retailers Index (^DJUSRA). While the tickers might not be familiar to you, the fact that Dow Jones has chopped up the U.S. economy into 135 or so independent pieces is really powerful. Each index is comprised of the publicly traded companies in each economic sector. When capital flows into any particular stock, its price goes up, which in turn pushes up the price of the index in which it exists.
For example, Apple Inc (NASDAQ:AAPL) exists in the Dow Jones U.S. Computer Hardware Index (^DJUSCR, currently neutral). Exxon Mobil (NYSE:XOM) exists in the Dow Jones U.S. Integrated Oil & Gas Index (^DJUSOL, currently expanding). Or AT&T (NYSE:T) which exists in the Dow Jones U.S. Fixed Line Telecommunications Index (^DJUSFC, which is also neutral).
Powerful, and here's a great way to view the aggregate: we analyze each index independently and assign it a recommendation based on its current prevailing trend: BUY (which means the index is experiencing net capital expansion), HALF (which means that flows are neutral), and CASH (which means the index is experiencing net capital outflows). We measure what percentage of U.S. sectors are expanding, contracting, or neutral and publish the results as the clearTREND® U.S. Economic Health Index.
Here are the current results (as of 4/17/2013):
These results can be tracked on a week-by-week (or even day-by-day) basis. The best use is probably every week or two.
So why should investors care? The implications are significant: if you manage a strategy that focuses on any segment of the economy (for example, a sector rotation strategy), identifying where capital is leaving and where it is going to is everything.
If you manage an asset allocation strategy, you can use trend analysis to guide overall exposure to risk assets. For example, you might decide that your overall exposure to the U.S markets would mirror the percentage of economic sectors that are expanding (currently, a 75% exposure to risk may be appropriate).
If the economic sector you work in is experiencing capital outflows (for example the Dow Jones U.S. Asset Managers Index - ^DJUSAG), you might make personal financial decisions to reduce risk in your personal 401(k) or other investment account should your job situation become tenuous. You might also use this data to determine the appropriateness of your overall personal debt level.
If you work in mergers & acquisitions, you can use this data to identify market sectors that may be ripe for investment banking opportunities. You might also guide the owner of a private business to either execute a personal sale or acquisition when a primary trend turns.
The possibilities are many.
In addition to the basic expansion/contraction dynamic, you can also dive deeper into the individual numbers (www.cleartrendwebapp.com) to determine how likely any new change in trend is likely to continue by looking at the percentage of past success, by comparing historic draw-downs for each market segment to a "managed" approach, and more.
I'm like a kid in a candy store with this kind of data - I hope you are too!