Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

How not to Read Economic Data while Trading/Investing

4 min read

Which is Good for Stock Markets? This is the very first question asked to all the workshop participants in Bangalore after showing a Nifty daily chart just to grab their attention on me. And the following questions were shown on the slide and asked the participants to identify the factors which are good to the market.

CNX Nifty

 
Factors Good For Stock Market

Declining Interest Rate?
Falling Inflation?
Falling Gold/Oil?
Appreciation of USDINR?
Good GDP Numbers?
Good IIP Number?
Political Stability?

Most of their answers were yes to the questions. If your answers are also “Yes” then this article is for you.

Is Fall in Interest Rate Good for Markets?
Interest Rate

The way economist and the media projects to the common people that fall in Interest rate is good for markets. But history paints a different picture. The above picture shows Interest rate from 2000 to till date(March 2015). What you can observe is when the stock market fall down sooner or later the interest rate also came down. #BigPicture

Iam not a fundamentalist to comment on this. But the fact remains the same for the last 15 years. And rise in stock market is followed by rise in interest rates. So now you could feel like rising Interest rates are good for Stock Markets? But wait when RBI governor cuts interest rates in Feb 2015 market mood was positive and stock market goes up on that day followed by life time high in Nifty & Sensex. However when RBI governor cuts the interest rate second time in a row on 4th Mar 2015 stock market tanks from the all time high. So whats wrong with the data we are reading?

How about a Good GDP Numbers?

Till Jan 2015 we are in a assumption that our 2 trillion dollar economy is growing at a very slow rate than the pre historic figures. Our linear thinking says higher growth rate should have strong positive impact in the stock markets and slow down in the growth rate might affect the sentiment in the market.

But what happened is pretty unusual and after 2010 the GDP started slowing down drastically and right from 2012 onwards our annual GDP rate remains below 6% and still markets are able to register newer high.

Pre JAN 2015 Annual GDP Rate

GDP Pre Formula

And later on 30th Jan 2015 Statistics Ministry Changes Base Year for Benchmark, Switches to Market-Price Calculation. i.e there was change in the computation of GDP calculation method which shows that GDP growth rate was accelerating from 2013 onwards and the economy grew by 6.9% in the year that ended last March. Using the previous methodology, GDP expansion that year was 4.7%.

Now the questions comes to every ones mind that what if tomorrow once again the base year of the benchmark data got shifted again or if economist comes with a different formula and say stories about the growth of our economy? Where is the reliability of data to trust and invest?

Post Jan 2015 Annual GDP Rate
GDP Post Formula

Can we take cues from Crude Oil?

Falling Crude oil is good for stock markets. It is yet another general assumption projected to the common people. very recently there is a landslide in crude oil prices (MCX Crude oil prices shown below). If you try to correlate this event with current stock market movement yes Nifty and Sensex had rallied to life time highs. so the rise in crude is good for stock markets? Are people moving money from Commodities to Stock Markets when the commodity asset classes are not doing good? But wait you can also see that during 2008 sub prime crisis period Crude taken down in tandem with the market to all time low. Sounds confusing ain’t?

Crude OIL

How about taking cues from Currency?

Curreny is yet again a economic indicator. Unlike GDP, IIP, Inflation kind of economic data are so delayed and realized at the later dates but following currency is so realtime and could a better option in taking decision based on currency movements?

Once again trying to correlate with the Nifty/Sensex movements we get puzzled with the weird correlation happening between stock and currency markets. The Big Picture says right from 1947 ( 1 USD = 1 Rupee ) rupee is weakening against dollar and so the markets are appreciating till now.

So is rising rupee is good for stock markets? But the media journalists and economists might have a different opinion on this. And some one could say tomorrow that FII’s are controlling more than 50% of the market and so market is not impacted by the surge in USDINR. So how about when FII’s are taking their money out of India wont that be bad for Stock Markets/USDINR?

USDINR

Is Terror Attack Bad for Markets?

Conventional wisdom says Terror Attack is a bad thing for people and economy. So lets take mumbai terror attack (guess you know NSE, BSE both the exchanges are in mumbai). Ask any of the investors/traders sentiment when he/she has a huge positions in the market during the attack. Mumbai terror attack is one of the worst ever nightmare in our Indian history but how can the market taken so positive for consecutive two days of positive closing?

And to be noted that later the terror attack market witnessed a fall as shown below. And that is the period we are very close to the bottom and such events could have very easily scared any value investory and ofcourse the news traders might end up in taking shorts when there is a terror attack.

So Terror Attack is Bad for Economy/People and Good for Markets in Long Term and Short Term? Seriously I dont have any idea on it.

Terror Attack

Car Sales and Auto Stocks

Car Sales is yet another number which could make you bonkers after seeing the complete data. You can see that car sales numbers are at historical highs during 2012 period and later there is a slow down in the car sales. People are not crazy on cars as before. And how does that witnessed in Stock Prices like Maruti, Tata Motors, M&M? I let you to explore it!

Car Sales

My Take
1)Iam not saying doing a fundamental analysis is a very wrong thing in the planet. Possibly “the way we understand the so called fundamental analysis is so wrong”.

2)Economics news are just sentiment factors which has a momentary impact in the market. Trying to correlate in your investments/trading decision is yet again a wrong thing. At the end of the day Market Proves that we are wrong about our predictions.

3)Try to understand how to play the news which is way different and realistic from creating a simple linear formula to identify good and bad about economic events.

4)Markets are completely different from Economy in the long run. Its neither lagging/leading/In Sync. Its just different!

[Image Credits : Tradingeconomics ]

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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2 Replies to “How not to Read Economic Data while Trading/Investing”

  1. If you are a trader just follow the charts and if you are an investor just buy on dips good stocks. Forget everything else

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