The most important data for traders to watch – and what to ignore

published 21 January 2011

In today's markets, with incredible amounts of information at our fingertips via the internet, it is all too easy to feel overwhelmed. That can lead to inaction. The modern phrase 'paralysis by analysis' describes this perfectly. Many relatively novice spread betters get so absorbed by minor details that they can't see the wood for the trees.

Not only is there the hard data, such as the US economic reports, there are blogs galore espousing opinions, and newspaper and magazine articles covering a wide range of financial themes.

(And if you trade individual shares, there are the company reports for light relief!)

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But because I trade only the largest markets Gold, FTSE, Dow, S&P, Euro, GBP, Yen, and occasionally other major currency crosses I can keep my radar screen relatively light. This approach has many advantages.

Firstly, I do not need to look at any company news or opinions. Secondly, the major US reports are released on a defined schedule, which makes trade planning a bit easier. If you wish to know, for example, when the US Jobs Reports will be published for 2011, the Bloomberg website has all the information.

Thirdly, there is hard data available of market sentiment, especially with stock indexes. (I often refer to the AAII (American Association of Individual Investors), which polls its members daily on whether they are bullish stocks, bearish, or neutral).

In reality, I hardly ever pay attention to individual news items. I have found that a news item rarely coincides with a big market move that was not flagged beforehand. The market seems to have a sixth sense here. Overwhelmingly, the main trends are not affected by the release of individual news items.

But I do scan several blogs, reports, and articles on the macro economic picture, because the blogs, reports, and articles are driven by the market not vice versa. That's right market action determines data and opinion, not the other way around. If you have difficulty with this idea, just think about the current bull market in stocks and the overwhelmingly bullish opinions of the "experts".

A recent poll of 13 chief economists at the biggest Wall Street investment banks found that they were bullish to a man for 2011. Not a single bear among them nor a fence-sitter!

What really drives pundits' opinions?

Now look at the US economic reports of the past few weeks. These continue to paint a picture of a very weak economy, being kept on life support by government stimulus. The market is clearly ignoring this 'bad' news, and cheering any number with a positive sign on it, no matter how small. Here is the daily chart of the Dow, showing the relentless bull market.

(click on the chart for a larger version)

The bull market is creating the bullish opinions. All the 'experts' are doing is adopting the default position of extrapolating the trend from the previous couple of quarters. Also at work is the herding impulse. The costs for a particular economist employed by a big firm who goes against the herd are very high set against the potential benefits, particularly if he is wrong. The pressure to conform is immense. Yet many investors and traders gain confidence when they see prominent figures agreeing with them! We must not fall into that trap.

Independent swing traders have to look for extremes in sentiment, because that is where the best profits lie. And this is where a trader must leave his own opinions behind. The stock market is saying that it wants to move higher, despite the negative news and reports. A trader may feel otherwise, but he must not fight the market if he wishes to prosper.If you do regularly read lots of reports and opinions, then I recommend you do so not to form or bolster your own opinion, but to measure the strength of others' opinions. Be a fly on the wall.

If you have followed my blog posts for a while, you will see that I pay close attention to what the market believes and expects. I have shown some superb trades partly based upon my reading of market opinion, where often too many are gathered on one side of the boat, and not enough on the other side. Eventually, the boat has to capsize. Hopefully, we will be waiting.

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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.

He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.

As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.