Ask a Broker

ISSUE 612 | DEC 2007

Q: I've noticed the market doesn't always react to data the way I'd expect. It declines on what should be good news, for example. Can you explain why that is and how I can approach trading given this occurrence?

A: Lind Plus Senior Market Strategist Marty Lundgren answers

This happens more often than you might think. One reason is the old saying: "buy the rumor, sell the fact." As an example, let's look at the impact the Federal Reserve might have on the S&P 500 index the day its policy making arm, the Federal Open Market Committee (FOMC), releases its decision on interest rates. This is a major event for world markets, and speculation about what the Fed will do goes on for weeks before the meeting among market participants and analysts. As we get closer to the meeting, many market participants believe with growing conviction that the Fed will cut rates a quarter-point. That tends to attract buyers into the S&P who want to take advantage of the rate cut and make a few bucks on the news. This is especially true the morning of the Fed meeting; players are putting their prognostications on the line, through their positions in the market. Then, the news is released, and the markets are proven right--the Fed cuts a quarter point. Instead of a rally, the market tanks. This is classic "buy-the-rumor, sell-the- fact" action. Everyone who wanted to be long the S&P already had a position on when the rate cut was announced. When the market failed to rally, it was a mad rush to the exit, driving the market down.

Something else to consider when data is released is that often there are revisions from the previous month's data. The employment report, released by the Bureau of Labor Statistics on the first Friday of every month, is a good example of this. The headline number, for the most recent month, is what the media tends to focus on, ignoring revisions from previous months that may in fact be moving the market. This creates the illusion of the market not reacting "properly," or the way you'd expect. For example, let's say the July report showed non-farm payrolls rose 150,000, but June and May numbers were both revised sharply lower, from a gain of 150,000 to only 2,000. The overall employment picture wasn't as strong as originally thought, and the market needs to re-price itself to reflect that.

You also need to consider what the market is expecting, or pricing in, versus what was actually released. For instance, the recent release of housing starts data generated headlines such as "worst housing number in 16 years." In fact, analysts had estimated housing starts would be down 4.5 percent, and the actual number showed a drop of 4.3 percent. So in actuality, the report was not as bad as many had feared, and that caused the S&P 500 to rally slightly. Similar to the employment example, participants had been positioning themselves in the market based on their analysis of where the economy is at, and when data proves otherwise, the market needs to readjust to reflect that.

These are just some of the things you need to consider when trying to trade off data. Please feel free to contact me with any questions you have about this topic, or to tailor a specific trading strategy for your unique situation.

Marty Lundgren is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. He can be reached at 866-317-9477 or via email at mlundgren@lind-waldock.com.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

© 2007 MF Global Ltd. All Rights Reserved.