William Hester from Hussman Funds put together an excellent analysis about how surprises in key economic data can drive the stock market – both up and down.
As you might think, the stock market goes up when economic data comes in better – or in the current case, less bad – than expected. And vice versa.
The most interesting takeaway for me was the lack of trending in these economic data suprises. According to Hester, expectation levels are adjusted quickly, leaving a lot of room for disappointment (and investment losses) when, say, economic suprises to the upside do not continue to delight.
Hester concludes that the major risk for investors in the current environment is when the broader market is overbought, and follow up economic data is not able to support the generally supported rosy outlook.
If you think, as we do, that this is just a bear market rally, be very careful with your long positions, and don’t be afraid to get out of positions on rallies. This is not a time nor place to buy and hold.