Confusing Times – The Array of Conflicting Market & Economic Data

9.7.2010

Those looking for a clear picture from common economic indicators are likely scratching their heads. Some indicators have reached extreme levels and others have not which means that traders would likely want to use these signals but other data is probably holding them back. For example:

The VIX, which is a measure of volatility in the market (basically how frantic or bouncy the market is) is hitting extremely low levels. This would mean that investors are not to scared. The Vix reached amazingly high levels as the market dumped in 2008. As you might be guessing, this is often seen as a contrarian indicator – if people are scared, it may be time to buy; when people are relaxed and complacent, it may be time to sell. Right now, the VIX says people are not worried but that counters the AAII.

I wrote about the peak bearishness of the American Association of Individual Investors on my WHA site here which is also seen as a contrarian indicator. The AAII index measures how many financial advisors are bullish/bearish/neutral and when advisors are bearish, it often means a rally is coming. When advisors are bullish, it often signals a top. Of course this is a secondary indicator but still prominent. Right now, advisors are super bearish which is telling us that stocks may rally.

Gold is powering up today. Gold has been mentioned as an indicator that people are¬†worried about the economy – a reason I often see used in major news outlets. However, I think they miss the point. In my opinion, the reason gold goes up when the economy stumbles in because gold buyers know that economic weakness will likely lead to more MONEY PRINTING and therefore driving down the value of paper currencies worldwide and the value of ‘real money,’ i.e. gold, higher. Also, as the economy weakens, it is likely that the government will borrow and spend more, which is never bullish for a currency vis a vis gold.

Treasury bonds recently hit extreme levels not seen since the bottom of 2008. The yield was super low which was revealed in the low mortgage rates you likely have seen advertised lately. This could also be seen as a contrary indicator that it’s time to sell bonds and buy stocks. However, people have been saying sell bonds/buy stocks for a while now and that hasn’t worked.

What Does All of This Mean?

I actually don’t make major decisions based on such things as the AAII index or the Vix – though I use it to help guide when to execute my major decisions. For example, I may make a decision to be in a certain industry due to the fundamentals and outlook. I may make my entry point based on some of these secondary indicators to lower my entry cost.

I know that many casual traders get themselves worked up with all of this data but I find it much easier to get a bigger picture, and work with that. Namely, in my mind, the economy is not so strong (you might be saying “duh of course”), and the data coming out, like last week’s jobs data, was misinterpreted. Governments will continue to borrow and spend and the Fed will print money; furthermore, European authorities will bail out more banks and attempt to flood troubled member economies with printed money. Japan will continue its Neo-Keynesian 2 decade money printing disaster (it’s a population problem folks! and too much government interference). Also I think that now that governments have blown quite bit of money on bailing out banks (and governments), that it’s time to put people to work, FDR style. It’s already starting with President Obama’s call to spend $50 billion on infrastructure. This will likely pick up worldwide (China has been going high speed on this) and lead to increasing needs for commodities and construction & engineering and design services.

Therefore, this macro view drives how I invest even though I may use some of these other indicators to help me decide when to invest. Remember this when you are tempted to make a decision emotionally based on some headline. Furthermore, understand that even the pros are confused – and one glaring point that seems to be evident is that the mainstream financial media know increasingly more about the various market indicators that used to be known by only a few. When an economic indicator is reported, such as the “sighting” of the recent “Hindenberg Omen,” it likely will mean much less since everyone knows about it.

It’s time now for investors, especially pros, to do serious research, formulate working theses whether on the macro or micro scale, and work with that knowledge. And then just relax (if you can) and let your thesis play out through the massive day to day gyrations. Make investing “businesslike” as Buffet recommended.