There are many factors that influence the price of a certain stock, all these factors need to be grasped and understood so that we can make a informed decision based on quality analysis.

Before we can do fundamental analysis we need to assess the state of the Economy. The Economy of a country goes through cycles of boom and bust periods.

1. An expansion of above-average growth.

2. A peak where growth levels off.

3. A contraction of below average growth.

4. A dip where contraction levels off.

Economic Indicators

Economic Indicators are statistics about the economy. Economic Indicators allow analysis of economic performance and predictions of the future.

1. Interest Rates.

Interest Rates are set by the central bank of a particular country. This is then used by banks to determine their rates for saving and lending. A cut in the rate would stimulate the economy. A rise in the rate would hamper growth.

2. Inflation Rates.

Inflation is a measure of how price is generally rising or falling. This is measured using a basket of essential products that we use on a daily basis.When there is a rise in inflation, our disposable income falls and thus the economy begins to slow. When there is a fall in inflation our disposable income rises and the economy begins to grow

3. Unemployment.

The unemployment index measures the amount of individuals in the workforce who are currently out of employment. When unemployment rises then the productivity of the economy falls and as a result growth slows. When unemployment falls the productivity of the economy rises and as a result growth increases.

4. Trade Difference.

This measures the difference between imports and exports for a particular country. When there is a rise in exports the economy may get overheated and inflation rises. When there is a rise in imports the economy may alleviate its inflation pressures.

Once we have mastered the economic indicators we need to find out where we are in the economic cycle. we do this using the following method. Before we can begin any sort of trading, prudent investors will always need to find out where we are in the economic cycle.

Investigate which sectors are leading and which are lagging (Leaders and Laggards). (See Leaders and Laggards Column in the FT) Once you have found Leading and Lagging sectors, you can determine the stage of the economic cycle. This will be discussed in depth in the later sections where I will go through the entire process of picking a stock.

We also need to know the Market and the sub catagories within the market. There are a vast number of stocks on the market. We need a way to sort them to make our analysis more feasible.

Market – This is the entire stock set

Sector – This is a subsector of the market i.e. Technology

Industry – The sector is then divided amongst industry groups i.e. Technology Semiconductor

Dow Jones Index

This table shows the sectors that make up the Dow Jones.
Notice that all sectors are not equal and have individual weights attached to them.

S&P 500 Sector Breakdown

This table shows the sectors that make up the S&P 500 Index.
Notice that all sectors are not equal and have individual weights attached to them.

NASDAQ Composite Index Sector

This table shows the sectors that make up the NASDAQ.
Notice that all sectors are not equal and have individual weights attached to them.

There are certain sectors that do well in certain periods. Once we find out where we are in the economic cycle we place short positions on the Sectors that perform bad and long positions on the sectors that do well.

Sectors are a group of certain stocks that are similar. Some Sectors perform better than others at certain economic stages.

1. Technology, Transport, Capital Goods
2. Capital Goods, Manufacturing
3. Energy, Basic Materials, Food, Consumer Staples
4. Consumer Staples, Utilities
5. Financials, Consumer Cyclicals

That concludes our section on Economic Indicators, Please go to the next section which is on Economic Calander.