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Buying Stocks on "Strong Economy"? Think Twice
Traditional economic indicators are lousy predictors of the stock market trend.
Regular readers of elliottwave.com know that at EWI, we constantly say this: One of the biggest mistakes that analysts and investors make is to use the news to predict stock market trends.
Here's a fresh example. At 9:30 AM on Tuesday, Sept. 1, the DJIA opened higher. At 10 AM, two U.S. economic reports came out: the ISM Manufacturing and Pending Home Sales indexes. Both were positive. At 10:32 AM, an Associated Press headline and story said:
Stocks up on manufacturing data -- News that the manufacturing industry has grown for the first time in 18 months is giving the stock market a boost. ... Meanwhile, an index of pending home sales rose in July for the sixth straight month. Following the reports, the Dow Jones industrials are up 53 at 9,549.
One hour later, the DJIA lost all gains and slid 160 points lower. A new AP headline said:
Stocks fall after manufacturing, housing data -- Stocks fell sharply Tuesday, giving up earlier gains... Investors were expecting the improvement, and many may have decided to take some money out of the market, playing it safe ahead of the government's August employment report, which comes out Friday.
So the reason for the drop was some sudden "profit-taking" by cautious investors? I wish I knew that when I started buying stocks after the earlier report on how the strong economic news was "giving the stock market a boost"...
Media agencies do a great job of getting the news out quickly, but you see my point -- new stories are always one step behind the market, never ahead of it. News predicts nothing beyond the span of maybe a few minutes. Just think back to mid-2007, when the DJIA topped out amidst "the goldilocks economy" and bottomed in March 2009, when "fundamentals" were horrible. That's no accident!
Stocks lead the economy, and if you focus on the latter, the stock market will leave you in the dust almost every time. To see where stocks (and, by extension, the economy) are likely headed, read the new, September Elliott Wave Financial Forecast -- online, risk-free, instantly.
(EWI's latest, September Asian-Pacific and European Financial Forecasts are online now, too.)