Fundamental Correlation


Posted on Thursday, August 10, 2017 at 1:42 PM

The title sounds fancy but a good technician uses charts to appreciate the impact of economic or fundamental events. The immediate or knee jerk reaction to economic reports exposes sentiment. There are countless books and articles that preach the so called ‘proper way’ to react to economic reports. Fundamentals or supply and demand principles move markets, of that there is no doubt. It is diversity of expectations that move markets. And such moves reveal momentum and frequently start trends.

In just the week there were 2 incidents that surprised traders in the financial sector. The first was the job openings report, also known as JOLTS. It was reported that job openings had increased far more than expected.  Normally this report has little if any impact on interest rates and stock indexes. That was not the case this past week. Equity indexes spiked higher and treasury futures were hit hard, not because the report showed economic growth, but because the number exceeded expectations by a large margin.

The lesson here is that reports near consensus estimates are already priced in. The degree of difference between expectations and actual results is what makes markets move.

For example, let’s say a report is expected to show improvement in the economy. If the numbers are positive, but not as optimistic as expected, the market will likely fall. Even though the report was bullish, it was not bullish enough.

The S&P chart shows the spike higher early in Tuesday’s session last week. In just 60 minutes the rally spanned the length of an average day range. It was followed by a violent reversal later in the day following more threats and increased tension with North Korea. 

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