Question:

How do you read fundamental data such as non-farm payroll and so on? How do you evaluate the numbers? What do you do to gain insight on the markets for the next day by the numbers? And what about earnings reports how do you get insight from the numbers expected? What are the proper ways to evaluate the fundamental data?

Thanks for all your help!

Frank from Numbers town

Answer:

Frank, as always, the questions are bigger than this column, but I can answer them to a numerical degree.

Evaluating the “numbers” is, in a way, personal, although some are key to all traders, such as the one you mentioned, non-farm payroll. This number tells us how many people are working (or not working) outside of agriculture. These days, this number is key to monitoring the economic recovery, and it can be a catalyst to swing the market in either direction. Often, the market “builds in” the expected number, which smoothes out the directional movement. Sometimes, though, the actual number is unexpected, and this can create huge movement in either direction. The same is true for corporate earnings. Since both are kept “secret” until the announcements, retail traders are in the same boat as everyone else—reacting to the numbers. Now, if you want to be proactive, not reactive, look to the analysts “expected” numbers. The expected numbers are found everywhere financial information is credibly discussed (TV, magazines, Internet, newspapers). Just find your source and follow it.

As to the question of properly evaluating fundamentals … Are you are referring to the fundamentals of the economy, the fundamentals of a market, or the fundamentals of a company? All are relevant to traders. In my opinion, though, the way to evaluate all of them is in context, meaning their “value” is dependent on your understanding of the big picture. For example, if earnings for corporation XYZ are 20% higher year-over-year, then you must understand the economic conditions of last year and this year to understand the true value of the increase. This is the context. The corporate earnings coming out now are a prime example of my point. One should exercise care when buying or selling on these earnings because of the economic conditions of last year and this year. Bottom line earnings are somewhat inflated because of cost-cutting, inventory reductions, and, most importantly, lowered expectations. The more valuable number to look at is the top line, which is revenue. I wish I had more space because there is so much more to say, but I hope this opens the door for understanding the “numbers” better.       

Trade in the day; invest in your life …

Trader Ed