When analysing data releases it's important to bear in mind that the market's reaction doesn't necessarily conform to what the theory would initially dictate. For example, if the market is expecting an upbeat number and the actual figure is fairly upbeat, one would expect the market to perform well thereafter. However, in this instance, what commonly occurs is that the market, in fact, trades lower ! Why is this ? Surely, a good number for the economy should see the stock market trade higher ? Well, in theory, yes - but, in reality, as the market was already expecting a good figure and market expectations have been met, what one actually sees is 'a buy on rumour, sell on fact' type trade and the market moves lower. The opposite can also occur near market lows, whereby a 'bad' figure sees the market eventually trade higher as the poor expectations were already 'priced in' or 'discounted' by the market. These examples demonstrate that it is not just enough to understand how different economic indicators will affect a market in theory - what is also needed is a fundamental understanding of a) market expectations at any moment in time and b) how the market is 'positioned' at the time of the data release. If, for example, the market is short and you see a bad figure, what tends to happen is that there is excess demand in the market, as traders start to cover their short positions and you actually see the market price start to rise i.e. completely the opposite to what theory would lead you to believe ! So, not only is the market reaction determined by the expectations of the number released, but, the reaction can also be counter intuitive. This type of psychology can only be mastered over time, but, remember, there are traders out there, like ourselves, who have enough experience in the markets to make a pretty good guess at how the market is standing pre and post data release. Over time, the theory will become second nature and you will learn how the market reacts to different data at different times of the economic cycle.
Talking of the economic cycle, fundamental data releases go in and out of fashion depending on what traders are focusing on at any one point in time. As this is being written, the stock market's focus is on whether the US consumer will continue spending, and so keep the economy alive, or whether spending will be reined in, so dampening expectations of growth. Traders not only look at Consumer Spending figures to determine this, but, they also concentrate on the state of the job market and the housing market. Why, you may ask ? Well, if individuals start to worry about their job security they are likely to spend less, so causing economic activity to fall with a similar effect on stock prices. On the other hand, if the housing market remains firm they will feel somewhat more upbeat about their individual expectations of the economy and will maintain/increase their overall expenditure and stocks could be expected to rise. Therefore, the situation is never clear cut, but, a decent understanding of the how the variables all interact will enable you, over time, to become a better trader, as you will be aware that the market doesn't always react to figures as one would have initially expected pre-release of the data.
Another point to consider when looking at economic data releases is that different figures are considered more or less important by different markets at different times. For example, in times of rapid expansion and a potential threat of inflation, the bond market will pay very close attention to say, CPI or inflation based figures, whereas, not so long ago, when talk was of deflation, the bond market was more focused on economic growth related data and we saw a period of a rising bond market and, simultaneously, a rising equity market, which confused some traders for a while ! On the other hand, the foreign exchange (forex) market will have as its primary focus the data relating to the US Trade Balance - the reason being that this data records the balance of flows in and out of the country and, hence, is a proxy for the demand/supply of the currency. If the US is importing more than it is exporting, then, as a country, the US will have to sell its dollars on the forex market to buy foreign currencies to pay the suppliers of the imported products. Over time, this will tend to depress the value of the dollar and it will depreciate versus a trade weighted basket of foreign currencies. Traders will be aware of this, so will look at how much the monthly reported trade balance differs from expectations. This will, in turn, affect their actions in the marketplace, which will help determine the value of the dollar itself.
It is also important to be aware of the interaction of economic data releases, whic, on the surface, appear tracking the same variable. For example, Housing Starts are different to Housing Permits and it's important to recognise the distinction. Whilst, say, Starts might be slowing you could get a situation where, simultaneously, Permits are rising ! This is not a contradiction, since people may have applied for planning permission to build new properties without having actually started work on the dwelling. The fact that Starts are falling may lead traders to sell stocks, but, if Permits are rising, indicating a future expansion of the construction sector, then the overall picture could be seen as being constructive for equities. As mentioned before, it's all to do with expectations and looking into the figures in more depth, before making a snap trading decision. The more you are familiar with the subject, the more you quickly you will be able to arrive at the correct conclusion.
In a similar vein, it's also important to realise to what period the data being analysed relates to. The more up to date the data, the more relevant it will be to the market. At the time of the Iraqi conflict, nobody really cared about pre-invasion data once the war was over as it was skewed by worries over the outcome of the war. After the fall of the regime, traders started to concentrate on coincident, or up to date, data, as opposed to historical data about Q1 GDP, for example. Also, when looking at data releases, be aware of any revisions to past data, since these can have some serious ramifications if different to initial estimates. You may see a situation whereby the current month's data comes out bang in line with expectations, but, last month's data is substantially revised, so altering the market's view/expectation of that particular data series.
So, when looking at and reacting to date releases there are several important points to remember: