The significance of market sentiment along with other economic indicators should not be underestimated by traders. While these indicators are not absolute gauges, they can be helpful when considering market participants.
Watch our NinjaTrader Live recording below to get valuable insights on the role of market sentiment and consumer confidence in futures trading.
Topics discussed in this free livestream:
- Sentiment indicators are not always reliable: The importance of understanding the various sentiment indicators and various business and consumer metrics and how they interact with actual economic data and market price action. It should be noted however though that sentiment indexes and surveys can be skewed by emotional responses rather than hard data. Traders should be cautious when relying on these indicators, especially in uncertain economic times when the accuracy of data is in question.
- The limitations of consumer confidence: While consumer confidence indexes like those from Michigan and the Conference Board are widely followed, they may not provide timely or accurate reflections of economic reality. Traders should consider more concrete data points and be wary of overvaluing sentiment-based reports.
- Manufacturing Purchasing Managers' Index (PMI) as a leading indicator: Despite the U.S. economy being less manufacturing-driven, the Manufacturing PMI remains a critical leading indicator. It not only correlates well with the business cycle but also with market movements like the S&P 500. Traders should keep an eye on this index as it can provide early warnings of economic shifts.
Gauging Market Sentiment: Key Economic Reports to Consider
Traders need to stay focused on those key sentiment indicators and economic reports that drive markets like the Manufacturing PMI and the Employment Cost Index, which are important tools for gauging overall U.S. economic health. The Consumer Confidence Index is a broader sentiment survey, and serves as a reliable leading indicator for the business cycle and trend bias in the S&P 500.
- Employment Cost Index (ECI): The ECI measures the growth of labor costs in the economy and is considered one of the best indicators of wage inflation. It includes data on wages, salaries, and employer costs for employee benefits. The ECI is crucial for understanding inflationary pressures in the labor market.
- Consumer Confidence Index: This index measures the overall confidence of consumers regarding the state of the economy. It is based on survey data and reflects consumers' perceptions of their financial situation, the overall economy, and their expectations for the future. While useful, this index may be less reliable due to its susceptibility to short-term market fluctuations.
- Manufacturing Purchasing Managers' Index (PMI): This is a survey-based indicator that asks purchasing managers about their company's purchasing activities. It is considered a leading indicator of economic health, particularly in the manufacturing sector. The PMI is closely watched by traders and investors because it often correlates with the business cycle and can predict economic trends.
Analyze Accordingly: Consider the Accuracy of Market Sentiment When Trading
One concern is that in recent years the veracity of economic data has come into question. The recent revision of jobs data which adjusted the numbers for jobs created in 2024 downward by 818,000 was an example that sparked additional skepticism among traders and economists.
Trade Strategically by Analyzing Market Sentiment
As traders and market observers, we need to remind ourselves of the importance of balancing sentiment data with actual economic indicators. While sentiment surveys offer a glimpse into the collective mindset of consumers and businesses, they should be used in conjunction with additional data sources so you can make better more informed decisions as a part of your daily futures trading planning.
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