Friday, July 31, 2009

Three Ways You Know Economic Numbers Are Game Changers

This morning we found out that GDP contracted less than expected and consumer spending contracted more than expected. Stocks veered higher and lower upon the release before moving steadily lower.

How can we tell when economic numbers are game changers and when they're not? Here are several things I look for:

1) How do markets in general respond to the news? If we see correlated moves across currencies, interest rates, stocks, and commodities, that's a good indication that the numbers are causing a reassessment of value among global/macro investors and traders;

2) Do we break key price levels? Do we trade--and stay--above or below the overnight range to that point? Do we break price levels from the prior trading day? If so, across indexes, that's a strong sign that we're repricing value;

3) How does volume behave on the news? A surge in volume comes from institutional investors. If we see a very significant jump in volume on the news, it's a good sign that large market participants are acting upon the new data.

When we see all three criteria in concert, that's a strong indication that the news really is news to the financial community. All three criteria were met this morning, which is why my reversion scenario strengthened significantly upon the market response to the release.