One of the biggest lessons that investors and traders learned, or were at least reminded of, during the recent downturn and subsequent recession is that the financial markets are as interconnected as ever. This means that no trade or investment resides on an island. Whether it's an individual stock or broader ETF, each security is susceptible to broader economic conditions.
As such, it is not only advantageous, but essential, that any person navigating through the markets observe and analyze the impact of economic news releases and reports. While a good technical setup or a company with sound fundamentals may seem like an attractive opportunity, it can be negated by a broader downtrend if the economic or industry conditions are not right.
To gain better insight into this topic, we discussed with Toni Turner of TrendStar Trading Group on the importance of keeping an ear to the ground and getting a better understanding of the bigger picture.
EQ: Why should traders and investors pay attention to economic reports? How can reports or data releases have an impact on setups and strategies?
Turner: Traders and investors should pay attention to economic reports because some can move the markets dramatically, and those moves can actually stop you out of short-term trades and even longer-term positions. However, they can also provide opportunities to enter new positions too. Since the markets are very interconnected, some economic reports can present us with a straight-forward opportunity for trades. One example is the Auto and Truck Sales report, which usually come out at the beginning of every month. If the numbers are good, it can directly impact companies in that industry group in a positive way. Traders can plan trades in every related group from the companies in Basic Materials, such as metals used in the manufacturing, to the actual manufacturers or parts providers, and so on. A report like this can be fairly straight forward in terms of determining the long or short side of trades.
Some economic reports have a broader scope of impact. For example, unemployment data--such as the monthly unemployment report or the weekly jobless claims numbers—can affect a whole swath of groups ranging from bonds to consumer-related industries like retail and housing. These groups can rise and fall depending of whether these reports show that the unemployment rates are going up or down, and how the market digests these reports.
EQ: Which reports do you tend to follow more closely?
Turner: The most important advice that I want to share with traders and investors is that different reports are important to the market during different economic environments. It really depend on what the market conditions are at the time.
Currently, I follow the weekly jobless claims numbers, which can impact the market in the short term. I keep a running log of these reports in my head as to whether the claims are trending lower or higher because it gives us an idea as to the strength of our overall economy. The monthly ADP employment report is also important to follow for the monthly changes, as well as the jobs number with the unemployment rate that come out the first Friday of each month.
I also watch the Consumer Price Index to keep a pulse on inflation. Then there's also the manufacturing numbers like the Empire State Manufacturing Survey and the ISM report that come out the first trading day of each month. It's not so much because manufacturing numbers can move markets in a huge way, but I want to see if manufacturing is trending higher or lower or just staying even. Again, those numbers offer us clues to the overall health of the economy.
Another important indicator is the retail sales data. Given that two-thirds of the nation's GDP is consumer driven, there's a straight-forward play there. If the overall numbers are good, you can look at some successful retailers or in different areas of the Consumer Discretionary sector.
EQ: With some very significant reports scheduled this week, do you have any final takeaways or advice for traders when trading on economic news?
Turner: I'm not looking for any big shocks one way or the other. We can see that economic growth is slowing down based on the numbers we've been looking at. Hopefully, we don't get any surprises there. But as I mentioned before, how the market treats the numbers when they come out really depends on what the economic environment is at the moment. If our economy is sailing along and we're doing a full-court press, and unemployment rates and interest rates are low, then we don't care about some of those numbers that much. If, on the other hand, we see signs of slowing growth, then those numbers that we can brush off during other times suddenly become very important to us.
I would note that Wednesday is Fed Day, which is when the Federal Open Market Committee releases policy announcements. I'm sure most traders and investors know this, but Fed Day is not the greatest day to back up the truck and buy huge positions. That day should be used for educational purposes. The market can typically react to reports like this one entirely different from what you think will happen or how you think it will react. Our market is very fickle, and many times, the way she thinks and absorbs news is entirely unpredictable. So traders, especially, should not trade the news but rather trade the market's reaction to the news. And that goes for any economic report. The wisest move is always to give the market a few minutes to absorb the news. Then, instead of playing the news, itself—play the market's reaction to the news.