Today, we are going to talk about an another market's width indicator - Industrial Trends Orders (ITO). It is the longest-running UK private sector qualitative business tendency survey, which covers 38 sectors of UK manufacturing industry at chief executive level. The survey has been conducted on monthly and quarterly basis by the Confederation of British Industry (CBI) since 1958.
It is a leading indicator of business conditions. A level above zero indicates, that the order volume is expected to increase; a level below zero indicates, that the expectations are for the lower volumes. Nowadays, the reading is compiled from a survey of about 550 manufacturers.
In order to draw the conclusions from the level of this indicator, we should compare it with the expected one in each period. This method is used to establish, if the reading should be taken as bullish (the value higher than expected) or bearish (the value lower than expected) for the GDP. However, in our analysis we are going to examine its dynamics, which gives us an information about the value of ITO in comparison with the level one year back in time. The ratio constructed in this way, tells us how fast the value is accelerating and in which direction.
On the chart below we can see both the FTAS and ITO dynamics smoothed by a simple moving average:
At the first glance, we see a lot of irregularity here and not much correlation can be found, especially in the first half of the analyzed period. However, if you take a closer look, you will see, that some dependence can be found. We are talking about a situation, when Industrial Orders dynamics reaches a level of 20 from the bottom. Why these moments are important? They indicate the situations, when ITO dynamics is starting to reach dangerously high level and as we can see, the peak are going to appear very soon after that. Once, the peak had been reached, the ITO dynamic has been starting to fall down. In theory, it should be a bad signal for the whole…
