What the Economy Is and What it Has to Do With Your Trading

In this week’s issue of the Market Slice, we cover what the economy is and what it has to do with your trading, the art of sector and industry analysis, and the dangers of Trading TV talk shows!

Why “the Economy” is a Misleading Term
We are all accustomed to thinking of economic activity in aggregate, as “the economy.” But how useful is this designation, really?

Consider this simple macroeconomic model. It is not difficult to see that the complexity of the many, many interactions depicted here preclude any kind of generalized measurement that would be helpful to traders.

Wikipedia states:
Most economic models rest on a number of assumptions that are not entirely realistic. For example, agents are often assumed to have perfect information, and markets are often assumed to clear without friction. Or, the model may omit issues that are important to the question being considered, such as externalities.

Here’s what this means for us as traders looking for an edge in the markets:

  • Most economic analysis is of limited value. We don’t want to make decisions based on what we hear or read about how the economy is doing, or where things are going. General measures like GDP or official inflation numbers don’t tell us a lot, or provide an accurate picture. Broad economic analysis based on these kinds of models inherently limited.
  • Instead of thinking in terms of “the economy,” it’s better to look at markets and sectors when we analyze trading opportunities. Trading involves developing a demonstrable edge in specific markets, not the economy as a whole. Even purely technical systems are implemented in a “market environment,” so developing an outlook on economic sectors and individual markets is important.
  • Macro-economic analysis is least helpful with individual stocks. Evaluating stocks from a fundamental perspective entails looking at the details of that company. Occasionally companies will be impacted by macro factors, such as pandemic measures or trade policy. More often, though, it will be micro-economic factors like market share and sector performance – along with internals like P/E ratio and balance sheet assessment – that identifies the best stocks to trade.

So when you hear the talking heads on Bloomberg or CNBC talking about “the economy,” take it with a grain of salt. Those opinions are not likely to help you profit in your trading. The best opinions about trading opportunities come from people who make their living trading the markets, not talking about them on television!

Sector and Industry Analysis – Can You Go it Alone?
The S&P 500 index of large American companies is comprised of 11 sectors:

Price activity within these different sectors can diverge in significant ways from the performance of the market as a whole. Sectors are used by analysts to group economic activity based on category. Many analysts utilize sector strength in evaluating individual stocks. Sectors can also be traded with sector index funds, or with ETF’s (Exchange-Traded Funds) built around a particular industry group.

Generally speaking, traders will take a “top-down” approach to identifying the most promising sectors and then evaluating stocks within that sector to determine which have the best potential.

Bears can use the same method to find weak companies within a sector that is in a downward cycle, to make profitable short trades, even in a broadly rising market. Using a tool like barchart.com can make this kind of research easier. Here is a free webinar on the topic: Using Sector Analysis to Find Trading Candidates.

Doing sector analysis can be a daunting task… there’s a lot of information to look at. To get an idea how a professional equities analyst approaches the job, read this article.

Technical traders often dismiss this entire process. They use the idea that all the information is already “baked into” the price to dispense with the need for any fundamental analysis. However, most professional technical traders will utilize some fundamental considerations for deciding which asset classes or industry sectors are most suited for applying their technical system. This is why many traders prefer to work with a trading professional who has done the work and has years – even decades – of experience in the markets.

One of the biggest pitfalls that besets beginning and part-time traders is the risk of incomplete data. If you try to do the analysis for yourself, it can be difficult to make sure you cover all the bases. Trading on partial or incorrect analysis is as bad as skipping it completely… but it takes longer!

If you are one of those diligent researchers who always gets the whole story on an asset class, sector, industry, or stock, good for you! Your hard work will likely yield positive returns in the market. On the other hand, if you want o benefit from the professional approach without all the difficult, time-consuming work, speak with an FFR Trading Strategy team representative today. Our number is (800) 883-0524!

Pundits, Shills, and Traders
For some reason, many people think that a television personality who is paid as an entertainer is worth listening to for financial advice. While Jim Cramer may be the most egregious of these talking heads, all the personalities we see on Bloomberg, CNBC and the other financial news networks have one thing in common… none of them trade for a living!

Since the stock-in-trade of media commentators is glittering generalities passing as insight, it’s easy to understand why people fall for it. Still, the ever-shifting narrative of the corporate media spokespeople should be enough to warn anyone away from this kind of generic investment advice. I’m not saying you have to ignore them entirely… Hey, I watch the financial news, too. We all need to keep up with what’s going on in the markets, and in the world.But when we let those bought-and-paid-for opinions determine our trading decisions, we are on the way to losses!

At the same time, there is another group of advisors crowding the online space. These folks are more involved in the markets, so their patter has a ring of authenticity. This makes them even more dangerous to your financial health than the TV bozos. These are the shills, who have a strong financial interest in the recommendations they make. You find a lot of these characters in the precious metals investment arena. They have a boatload of arguments why gold, silver, and mining stocks are going to go up, up, UP!!! It just so happens that they are associated with companies that sell these products.

This is not to say that every guest you see on Kitco or Stansbury is a dishonest pitch-person. Not at all… there are many reputable voices in the market. However, you need to use your own research – including checking the records of these commentators – before making any decisions to jump into the market. The surprising thing is that so many traders don’t think twice about throwing their money into something they don’t understand because they heard about it online… but they are reluctant to invest in quality trading advice from a professional trader who has no “ulterior motive.”

For 16 years, FFR Trading has been sifting the gravel of investment advice to find the diamonds… serious, proven, market professionals who produce consistent gains for their clients. To find out how our vetted traders can do the same for you, speak with an FFR Strategist today at (800) 883-0524.

Keep up-to-date on managing your trading and investment portfolio – follow us on Instagram, Facebook, and Twitter! Happy trading, everyone!

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