In every market, there is a vast amount of fundamental data to keep track of. A lot of people are unsure what’s driving the markets right now, and what to focus on. We are in earnings season, which reaches its pinnacle on Wednesday. But there are also some key economic reports that could be market movers.
As a trader, it’s important to know which key reports to focus on in any given week, and how this data can potentially impact prices. I’ll focus on the top three reports I feel traders in the financial markets should be paying attention to this week, and what the implications might be for the markets upon their release: existing home sales, new home sales and durable goods.
You can find a “consensus estimate” for most key economic indicators about a week before each report is released, which reflects the median or average forecast that analysts and/or economists anticipate for each data series, based on a survey. It’s important to know this figure before you establish a trading strategy based on fundamental data, because sometimes a report may look positive or negative on the surface, but might not react the way you expect if it’s far out of line with these expectations.
Later this week, we have three reports which I believe could be potential market movers: existing home sales on Thursday, and durable goods and new home sales on Friday. These reports are for March, as there is a lag in the data collection. You will also often see revisions to prior report data, which is also important to pay attention to.
Existing Home Sales -Thursday, April 23, 2009
The consensus estimate for March is 4.68 million; February was 4.72 million
Measures the monthly sales of previously owned single family homes
When is it Released? 9:00 a.m. Central Time every 4-5 weeks
Who releases it? National Association of Realtors
Effects mostly: Interest rates, but a key driver to other markets
Drawbacks: Existing home sales are only counted at the actual time of closing, which may take months to happen and can result in seasonal fluctuations and irregularities.
Keys to the Report
About 80 percent of housing stock bought and sold are previously owned or used homes. The other 20 percent are new home sales.
Existing home sales stimulates the economy because buyers often are upgrading to larger homes, resulting in additional spending on furnishings and appliances. On the flip side, sellers may be downgrading their housing because their children are moving out or they are approaching retirement, resulting in more spending on things such as travel and hobbies.
In general, if these numbers jump, people are feeling confident about their situation and it stimulates several areas of the economy.
When this report was last released on March 23, February existing home sales were higher than the consensus forecast, posting a rise of 5 percent. The S&P 500 futures reacted with a nice rally of about 35 points. So you can really see how it can be a market mover.
Possible Outcomes
Rise in existing home sales can create inflation and cause:
- Bond prices to fall because of rising interest rates
- Stock prices to rally because of a stimulated economy
- Dollar to remain firm because of the possibility of rising interest rates
- Gold to pull back because the possibility rising interest rates will help to fight inflation.
Reduction in existing home sales can cause:
- Bond prices to rise because of an economic slowdown and a reduction in interest rates
- Stock prices to fall because of a weakening economy
- Dollar to weaken because of a reduction in interest rates
- Gold to rise because inflation may pick up.
Know the expectations for this number each month. Consider the possible outcomes if the data come out higher or lower than the forecast. You could find several trade opportunities in each of these markets based on your analysis.
New Home Sales – Friday, April 17, 2009
Consensus estimate for March 340,000;February 337,000
Tracks the sales of new single family homes
When is it released? 9:00 a.m. Central Time every 4-5 weeks
Who releases it? Census Bureau, Department of Commerce
Effects mostly: Interest rates, but also driver for other markets
Drawbacks: A sale is reported when the contract is signed, not at the closing like existing home sales. That means that some contracts may be signed, but due to complications may not close.
Keys to the Report
You’ll notice this number is much smaller than existing homes. About 20 percent of the homes bought and sold are new home sales.
Results of this report reflect confidence from builders on expectations of future home buying, and show how consumers feel about their financial ability to purchase a home. Even though the number of sales is smaller, this report can be more critical than existing home sales because new homes generally cost more. Even though given the recession some new homes are coming down in price, it’s generally still the case that they cost more than existing homes.
New home sales act as a leading indicator. They start to turn higher in the middle of recessions and the rest of the economy tends to start following. You can see how improvement in this data has provided a lift to the stock market, even though our economy is still in recession. People are starting to jump in now as they are seeing deals in new homes (including vacation homes) and the low interest rate environment has also spurred refinancing that has freed up cash to invest and spend.
Possible Outcomes
Rise in existing home sales can create inflation causing:
- Bond prices to fall because of rising interest rates
- Stock prices to rally because of a stimulated economy
- Dollar to remain firm because of the possibility of rising interest rates
- Gold to pull back because the possibility of rising interest rates will help to fight inflation
Reduction in existing home sales can cause:
- Bond prices to rise because of an economic slowdown and a reduction in interest rates.
- Stock prices to fall because of a weakening economy
- Dollar to weaken because of a reduction in interest rates
- Gold to rise because inflation may be picking up. Gold bugs would want to see home sales pull back, driving risk aversion.
Durable Goods – Friday April 24, 2009
Consensus estimate March 1.5 percent; February 3.4 percent
Key indicator of future manufacturing activity
When is it released? 7:30 a.m. Central Time every 4-5 weeks
Who releases it? Census Bureau, Department of Commerce
Effects mostly: Interest rates and most financial markets. This report affects manufacturing, shipping costs, commodity prices, and therefore nearly every market.
Drawbacks: Major revisions can send shocks to the market, and you may need to strip away certain components of this report to get a true reading. For example, military orders can cause dramatic fluctuations. This report can be fast moving, and therefore you need to act quickly in your analysis.
Keys to the Report
Durable goods are products that have a life expectancy of at least three years (aircraft, auto, machinery) and often make up the most important part of corporate spending.
These durable goods orders represent production that will cause factories and employees to be busy, creating stimulus for the future. An expansion in durable goods in times like we are in now is very encouraging. We would expect manufacturing output to increase and employment to improve. A slowdown in durable goods orders can result in factories closing shop and layoffs to hit the market. Inventories will sit and prices will likely be slashed.
Possible Outcomes
Rise in durable goods can cause:
- Bond prices to fall because of rising interest rates; it could show faster GDP growth in the future and higher inflation
- Stock prices to rally because of higher corporate profits
- Dollar to remain firm because of the possibility of a strengthening economy
- Gold to ease as risk aversion abates
Reduction in durable goods can cause:
- Bond prices to rise because of an economic slowdown and a reduction in interest rates.
- Stock prices to fall because of a weakening economy
- Dollar to weaken because of a reduction in interest rates
- Gold to rise
At our Lind Plus trade desk, we provide clients a list of the key scheduled economic reports in advance for each week, along with consensus forecasts and our analysis of possible market impact. That way you can plan an appropriate strategy. Even if you trade based purely on technicals, knowing about and tracking these reports can really help your trading.
Feel free to call me for more specific strategies in this or other markets to suit your individual risk tolerance, and ask about a special half-off offer for new clients.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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.
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