In following the economy, it is always advisable to track not only growth rates (rates of change) but levels as well. And, remember from the first few lectures, there are different ways of measuring growth rates (sequential, like month-to-month, or year-over-year). The media doesn't make this easy for you, all of the releases lately have focused on rates of growth and included only graphs of growth rates and not levels.
How can you go beyond this? Let me recommend a terrific web site for this: Economy.com's Freelunch. Its URL is: http://economy.com/freelunch. To access the data (for free) you need to first create an account, then disable pop-up blockers for that site so the graphs with data can appear.
Let's first look at new home sales. On the main page, this is under Real Estate and Sales. You are given a number of choices on the page that emerges. Choose View for New One-Family Housing Sold. A pop-up window with data and a graph emerges. Note that on the graph, you can change the data frequency (ex: go from monthly to quarterly), and/or you can change from the level of this variable to various rates of change (then click on the Refresh Data link).
Below is a table of what the markets are celebrating today: a rise in (sequential) new home sales of almost 5%, as sales went from 322,000 to 337,000 (seasonally adjusted). Look over these data and determine for yourself how well home sales are doing (always feel free to agree or disagree with the market for a longer-term perspective).
| 2009M2 | 337 |
| 2009M1 | 322 |
| 2008M9 | 434 |
| 2008M8 | 448 |
| 2008M7 | 505 |
| 2008M6 | 499 |
| 2008M5 | 515 |
| 2008M4 | 542 |
| 2008M3 | 513 |
| 2008M2 | 572 |
| 2008M12 | 371 |
| 2008M11 | 387 |
| 2008M10 | 404 |
Now let's look at the graph (click to enlarge) from Freelunch of the entire set of values (current levels). Isn't the cause for today's celebration by the stock market in response to this number obvious? It isn't for me!
Let me state a few rules of data analysis rules I have always lived by:
RULE #1: NEVER MAKE TOO MUCH OUT OF ONE PERIOD'S VALUE.
RULE #2: ALWAYS ATTEMPT TO FIT A GIVEN PERIOD'S VALUE INTO THE BROADER CONTEXT OF A TREND.
RULE #3: ALWAYS INCORPORATE ECONOMIC ANALYSIS INTO ANY ANALYSIS OF DATA TO TRANSCEND THE SHORT-TERM AND TO BEGIN THE PROCESS OF VISUALIZING WHERE AND HOW THE DATA WILL ACTUALLY BE MOVING IN THE FUTURE.
If the graph above were a price chart, what do you think the RSI would be telling us? Remember: just as positive rates of growth can become unsustainable, the same is true for negative growth rates (thank God!). We are clearly due for the equivalent of "oversold bounces" in much economic data. These should be able to sustain the current bear market bounce for a while. But for how long?
To arrive at an answer to this, the final thing I recommend that you do is to identify the sectors that performed best and make intermarket sense out of the pattern that emerges. Personally, I will have to wait to see what Jim Cramer says before I can reach any meaningful conclusions!
I was reading through a number of ulta-short ETF's discussion postings on google finance when I came across this post. I personally understand the point being made here because last Friday I fell into the trap of putting to much trust in technical analysis and stayed long over the weekend in ultra shorts. Most of the technicals pointed towards a bearish divergence and an end to a bear market rally, however Timothy Geitner came in with his bear tranquilizer machine gun (toxic asset plan) and put many of the bears to rest and broke a number of resistance points. At this moment I find it hard to pick a position with the uncertainty of when and what news will come out and how the market will react.
ReplyDeleterayepenbar@gmail.com wrote:
"it's useless because it's no longer a free market. IT IS IMPOSSIBLE
right now with technical analysis. Assume it hits a 50 day moving
average, a resistance point, a fib number, wave theory, or even a
bearish engulf single. All that goes out the window when Obama
suddenly announces another one of his speeches and reveals more plans
for the future. Even though they will be short lived. The government
won't stop interfering. It's all a gamble at this point. Flip a
coin. Your odds are just as good.
For example last thurs and friday we had 2 clear singles that the
bears were in and ready for a decline/ correction. What happens
Monday? Some plan comes out that'll buy off toxic assets. Did you
see that coming? Might as well flip a coin."