Making Sense of This Messy Economy

There are a few ways traders can make sense of the market.

Two of the most popular methods are fundamental analysis and technical analysis.

Fundamental analysis generally involves examining things like the economy’s overall health and stability.

For example, you might notice a trend in manufacturing output that others haven’t picked up on quite yet. And that could lead you to finding a great trade or investment in the sector.

The other popular method of analysis is technical analysis.

Technical analysis is the examination of historical price data to try and determine how prices will perform in the future.

This is what Jeff Clark and I do most of the time. While we also pay attention to fundamental data, we tend to do a lot of our work on price charts.

Both methods have their advantages and disadvantages, to be sure.

Technical Traders Will Have the Edge Right Now…

For instance, fundamental analysis makes use of a lot of lagging data. By the time the data comes out, it’s already old.

We’re usually looking at last month’s employment numbers, or last month’s measures of inflationary data.

If you nail the fundamental analysis, you’re probably going to be on the right side of the market for a long time.

But if you get it wrong, it will also take you a long time to adjust course.

Technical analysis, on the other hand, is a lot nimbler. You can quickly change your view on a market because you’re assessing price action in real time.

The problem with technical analysis is that it tends to be quite subjective. Two people can look at the exact same chart and see different patterns. Only time will tell who is right and who is wrong…

But right now, my assessment is that technical analysis will do traders a whole lot better than relying on the fundamentals.

The Numbers Are Messy

That’s because frankly, the economic data is a mess.

The number one issue the market is grappling with is when the Fed will finally lower rates.

A couple weeks ago, it looked like any rate cuts were quite far away. On April 26, the Fed’s preferred inflation gauge signaled that price pressures continue to remain elevated.

But on the other hand, there are now signs of economic weakness.

On April 25, U.S. GDP grew only 1.6% on a quarter-over-quarter basis. That’s considerably below the 2.5% that most economists were expecting.

And most recently, on May 3, the labor market only created 175,000 jobs versus the 238,000 that were expected.

It’s likely that over the next few months we’ll continue to see a slew of mixed data in these important reports.

In such an environment it’s very difficult for fundamental data to show a clear picture that helps guide traders.

The price charts are likely to be a far more reliable guide for skilled technical analysts.

So stay tuned because it will soon be time for another technical market breakdown of the S&P 500.

Happy trading,

Imre Gams
Analyst, Market Minute