Data Impact

Looking for explanation of market sell offs or rallies in macro data can be an interesting exercise and can keep you busy for a lifetime. Stocks down because of factory data is a very simplistic interpretation. Same data at different market phase will have no impact.

There are lot of speculators who track several macro data points like employment, factory orders, transport tonnage, housing permits, retail sales and so on to make sense of markets. Often it is tempting to dive in to the macro economics world and start tracking and talking like several TV commentators and pundits who write about such macro stuff. Reading lot of that kind of macro stuff can give you a sense of inadequacy that you are the only fool who does not understand or track it.

There are two critical things one must consider or at least I considered before abandoning the quest for holy grail in macro indicators and data. The first is data is a big speculators edge. No matter what you do, you will never get access to some of the best and timely and accurate databases as a small speculator. The investment banks, mutual funds, pension funds and large hedge funds have the resources and infrastructure to collect and manage such databases. Because the business is oligopilistic , each one keeps its data proprietary and jealously guards it. So some of the best data is not publicly disseminated. Plus there is a time lag between what you get and what big speculator get.

Second important thing to consider with data is even if you have an access to best databases, the data is only useful if it is a leading indicator. A data or indicator should be able to tell you the future direction of the market, then only it is worth it. Then you can use the data to forecast market. Very few things in macro economic data are leading indicator for market direction. All the talk about macro stuff might impress the cocktail crowd and might fool few clueless girls at bar, but if it was that easy, why would macro economic and big picture speculators be making their living selling newsletters and data services.

In fact macro data and too much analysis of them and beliefs in them can lead most analyst to be persistently wrong for extended period of time.Those who got stuck on housing lead slowdown had hypothesised that housing is a leading indicator for stock market. What they consider as leading indicator just does not act as leading indicator for market direction or the correlation changes. By the time they realise it the rally is over. The best leading indicator for economic growth is probably market direction itself.

I have looked at several macro economic variables and tried to model them before abandoning that approach. That is one way to trade. The other way is what I follow where I am focused on equity selection and more immediate to vehicle kind of data like earning, sales, price momentum, new product or management change as catalyst. Much of such data is actionable and comparatively easily available at low cost. Plus there are many ways to develop edge using it.

When I have billions to trade I will also look at macro things. For now researching and perfecting vehicle level edges is the best choice. You must only fight the battles where you have an edge.