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What Do Leading Indicators Say About the Economy? A Trader's Guide
Leading Indicators Are Talking: But Are You Listening Correctly?
Kamil Markets&Manners
August 24, 2025
What we'll explore today:
My costly lesson from ignoring the market's actual message during the longest yield curve inversion in history
I was dead wrong about 2023.
Coming into the year, everything looked bearish. The yield curve had been inverted since July 2022 in what would become the longest inversion in modern history. PMI was contracting. Inflation was sky-high. Russia and Ukraine were at war. The textbooks said a recession was inevitable.
So I positioned defensively, and waited for the crash that never came.
Instead, the S&P 500 surged over 24% and the Nasdaq exploded 43% higher. Suddenly all those carefully calculated defensive moves became a massive opportunity cost.
That experience taught me a hard but valuable lesson: what leading indicators say about the economy isn't always what markets do in response. Understanding this disconnect is what separates consistently profitable traders from those who get steamrolled by unexpected market moves.
The Indicator Trap I Fell Into
The yield curve inversion has predicted every recession since 1955 with stunning accuracy. When the 2-year Treasury yield rises above the 10-year yield, recession typically follows within 6-18 months. It's economics 101.
But in 2022-2023, I made a critical error: I confused economic indicators with direct market timing signals.
Here's what actually happened:
The 2/10 yield curve inverted in July 2022
The Fed continued hiking rates aggressively
I positioned for an imminent market collapse
Instead, the market surged to new all-time highs
Every U.S. recession in the past 50 years was preceded by a yield curve inversion - highlighting its power as a leading economic indicator, but not as a precise market-timing tool
The Fed’s rate-hiking cycles often align with yield curve inversions. In 2022–2023, aggressive rate hikes extended the inversion and created one of the longest on record.
The trap: while the yield curve warned of recession, equity markets continued climbing. In 2022–2023, this divergence caught many traders - myself included - expecting a crash that never came.
Why did I get it so wrong? Because I didn't understand three crucial realities about economic indicators that I'm about to share with you.
Reality #1: Timing Disconnects Can Destroy Your Performance
The first hard truth I learned: a recession signal doesn't equal an immediate market signal.
Historically, markets often rally for months or even a year after yield curve inversions before any significant downturn. During the 2006-2007 inversion before the Great Financial Crisis, the S&P 500 climbed another 22% before peaking.
In 2006–2007, the yield curve inverted well before the financial crisis. Yet the NASDAQ kept climbing into new highs, gaining over 20% before the eventual collapse - proof that inversion timing can mislead traders.
My mistake was turning too bearish too soon. I missed the "inversion rally" phase that precedes the actual economic trouble.
What this means for your trading:
Economic indicators give you the destination, not the exact route
Short-term trading decisions shouldn't be based solely on long-term indicators
Position sizing matters more than all-or-nothing directional bets
Reality #2: Not All Inversions Are Created Equal
The second mistake I made was treating all yield curve inversions as identical.
The 2022-2023 inversion had unique characteristics:
It occurred during a period of aggressive Fed tightening
It happened while corporate earnings remained surprisingly resilient
It coincided with post-pandemic economic reopening dynamics
What I've since learned is that context matters enormously. Leading indicators don't exist in a vacuum-they operate within specific economic environments.
For E-mini futures traders, this nuance is crucial. A yield curve inversion during high inflation and rising rates demands different trading tactics than one occurring during deflation or already-low rates.
Reality #3: The Speed of Information Has Changed Everything
The third factor I underestimated: in today's market, information asymmetry has collapsed.
When everyone knows about yield curve inversions and recession signals, their predictive edge diminishes. Market participants don't wait for recessions to actually arrive-they position in advance, sometimes even front-running the indicators themselves.
The practical implication: by the time you're reading about economic signals in mainstream financial media, much of their predictive value has already been priced in.
The Consistent Trader's Approach to Economic Indicators
After my expensive 2023 lesson, I completely rebuilt my approach to using economic indicators in my trading. Here's the framework that's serving me much better:
Step 1: Separate Strategic Outlook from Tactical Execution
I now maintain two distinct frameworks:
A macro outlook (based on leading indicators) that informs my general bias
A tactical trading plan that responds to actual price action and momentum
This separation prevents me from fighting trends based on what "should" happen according to economic theory. I can be strategically cautious while still tactically long when markets are rising.
Step 2: Use Time-Appropriate Indicators for Different Trading Horizons
I match indicators to specific time frames:
For day trading E-mini futures: Market internals, sector rotation, VIX term structure
For swing trades (1-5 days): Economic surprises, Fed speeches, earnings reactions
For position trades (weeks to months): PMI trends, yield curve changes, consumer confidence shifts
This alignment prevents short-term trading decisions from being inappropriately influenced by long-term economic signals.
Step 3: Focus on Rate of Change, Not Absolute Levels
The most actionable information often comes not from the indicators themselves but from their second-order derivatives-how fast they're changing.
For example, the absolute level of PMI matters less than whether it's:
Below 50 but improving (bullish)
Above 50 but deteriorating (bearish)
Accelerating or decelerating in either direction (trend strength)
I've found tracking the month-over-month percentage changes in leading indicators provides much better trading signals than the headline numbers alone.
Practical Applications: How I'm Trading E-mini Futures Now
Let's get specific about how this translates to actual trading decisions in E-mini futures:
When Leading Indicators Turn Negative But Markets Rally
This was exactly the scenario that burned me in 2023. My new approach:
Scale positions rather than flip completely
Instead of going fully bearish, I maintain core long exposure while gradually reducing position sizes as negative indicators accumulate.
Shorten time horizons
I shift from multi-day holds to intraday trading, capturing upside while limiting overnight exposure.
Use options for hedging rather than directional shorts
Rather than fighting the trend with outright shorts, I might buy put options on the E-mini S&P as tail risk protection while maintaining tactical long positions.
Focus on relative performance
Even in a broadly rising market during deteriorating fundamentals, certain sectors typically underperform. I look for these relative weakness opportunities for better risk-reward.
Example Trade: How I'd Handle It Differently Today
In early 2023, when PMI was contracting but markets were starting to rally, I would now:
Maintain a baseline long position in E-mini S&P futures ( or Nasdaq )
Day trade additional contracts rather than hold overnight positions
Target sectors showing relative strength (technology outperformed in 2023)
Consider buying long-dated, out-of-the-money put options as portfolio insurance. They can act as a cushion during downturns while still letting you participate in upside. If markets dip meaningfully, the protection pays off - and you can then look to buy futures contracts at better prices instead of being forced out of positions.
Re-evaluate after each economic release rather than sticking to a rigid bearish bias
This balanced approach respects both the economic reality and the market's actual behaviour.
The Three Leading Indicators I Now Trust Most
After my experience, I've refined which indicators I give the most weight in my trading decisions:
1. ISM Manufacturing PMI Rate of Change
The absolute PMI reading gets all the headlines, but I've found the month-over-month change in PMI provides better trading signals. When PMI shows improvement for two consecutive months-even while remaining below the 50 threshold-it often precedes significant market rallies.
For E-mini futures trading, PMI inflection points have proven to be excellent entry signals, particularly when confirmed by price action.
2. Initial Jobless Claims 4-Week Moving Average
Employment data lags the economy, but initial jobless claims give us weekly insights rather than monthly. The 4-week moving average helps filter out noise.
When claims unexpectedly rise for three consecutive weeks, it often provides an early warning of broader economic weakness that might not yet be reflected in other indicators.
3. Yield Curve Dynamic Movement
Rather than just noting whether the yield curve is inverted, I track the speed and direction of changes in the spread.
The most powerful signals come when the yield curve begins to rapidly steepen after a prolonged inversion. This steepening often precedes substantial rallies as it indicates markets anticipate Fed easing.
My Biggest Takeaway: Markets Lead the Economy, Not Vice Versa
The most important lesson from my 2023 miss was understanding that markets typically lead economic reality by 6-9 months. Leading indicators tell us where the economy is likely heading, but markets are already pricing in conditions far beyond those indicators.
This creates the counterintuitive situation where:
Markets often rally hardest when economic data looks worst (but is improving)
Markets frequently top out when economic data looks best (but is peaking)
For futures traders, this timing gap is where the greatest opportunities-and dangers-exist. Trading the economic reality rather than market reality is a recipe for inconsistency.
Actionable Steps for Your Trading Plan
If you want to improve your consistency with economic indicators, here's my practical advice:
Create a weekly leading indicator dashboard
Track the 5-7 indicators most relevant to your trading timeframe and update them weekly. Focus on direction and rate of change rather than absolute levels.Implement a two-tier position sizing system
Maintain core positions based on actual market trends, with a smaller portion adjusted based on your economic outlook. This prevents all-or-nothing bets.Trade with two-sided awareness
Instead of doubling down in one direction, consider relative strength. Maintain your core position, but look for opportunities to offset it by shorting (or underweighting) the weakest asset, sector, or index. This way, you’re not simply “hedging” - you’re spreading risk and letting market leadership guide you.
Set calendar alerts for key economic releases
Don't rely on catching headlines. Know exactly when PMI, consumer confidence, and other key data points will be released, and plan your positions accordingly.Journal indicator effectiveness
After each major market move, note which indicators provided accurate signals and which were misleading. Your personal indicator effectiveness journal will be far more valuable than any textbook.Focus on what indicators SHOULD be saying vs. what they ARE saying
When there's a disconnect between economic theory and market reality, the gap itself becomes the most important signal. Don't ignore either side of this equation.
When to Trust Your Indicators Anyway (Sometimes Being Early Is Right)
Despite my 2023 error, there are scenarios where following leading indicators despite contrary market action is the right call:
When leverage and speculation are extreme
If negative indicators coincide with historically high margin debt, retail option speculation, or IPO frenzies, the indicators usually win eventually.When central banks are fighting the trend
If the Fed is actively tightening while indicators deteriorate, patience with bearish positioning often pays off.When corporate earnings begin confirming the indicators
If revenue growth slows in line with what indicators predict, that confirmation significantly increases their reliability.
I still believe the current yield curve normalization, improving PMI, and declining inflation create a more balanced risk environment than we've seen in years. But I won't make the same mistake of ignoring what the market is actually doing while waiting for textbook outcomes.
Final Thoughts: Respect Both the Message and the Messenger
Leading economic indicators remain invaluable tools for traders-they've saved me from numerous potential losses over the years. But my expensive lesson from the 2022-2023 yield curve inversion taught me that how you interpret and apply these signals matters just as much as the signals themselves.
The yield curve, PMI, consumer confidence, and other indicators are telling us a story about future economic conditions. But markets are complex adaptive systems that incorporate this information along with countless other variables, including positioning, sentiment, and policy responses.
Your job as a trader isn't to predict the economy perfectly-it's to navigate markets profitably. Sometimes that means respecting what indicators say about the economy while acknowledging that markets might ignore those warnings for longer than you can remain solvent fighting the trend.
The most consistent traders I know maintain a healthy respect for leading indicators while remembering that the market itself is the ultimate leading indicator.
What's your experience been with economic indicators and market timing? Have you found certain signals more reliable than others for your trading approach?
If you want to keep digging into how the economy really works, my breakdown of How Do Interest Rates Affect Business Activities in Our Economy?
Or, if you’d rather sharpen the trader’s edge directly, start with understanding expectancy - the math behind consistency in markets:
Expected Value in Trading: Measuring Your Strategy’s Real Potential
Kamil - Markets&Manners
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