What Data Do Traders Use in a Pandemic?

At a Glance

  • The disconnect between stock markets and the economy creates tough decisions for traders looking for market moving data
  • A mix of technical analysis of stocks and reliance on traditional data could be the right mix for traders in the COVID era

More than five months into the COVID-19 pandemic, the market is even more event-driven and tied to news than it was earlier in the year. Pair that with the pace of news and how quickly it affects economic conditions, and traders may be looking for new or more reliable sources of instant information to make decisions.

Most traders and investors recognize that there is a huge disconnect between the market recovery and the actual economic recovery. Although the S&P 500 reached positive territory on the year, many companies are still negative, businesses continue to struggle and unemployment numbers continue to be high despite falling from their highs in the Spring. With the disconnect as pertinent as ever and economic reports moving markets daily, which data points can traders rely on to make informed decisions?

A Different View of the Stock Market

Traders wishing to analyze the overall trends of the broad market can turn to the S&P 500 advance-decline line.  The advance-decline line is an indicator that is used to show the number of individual stocks that are following the trend of the overall market and can be used on a day-to-day basis with other technical tools to confirm trends or identify price reversals.

Advancing stocks are the number of stocks that are traded above the previous day’s closing price and declining stocks are the number of stocks that are traded below the previous day’s closing price. This indicator is especially useful in this market environment because S&P 500 returns are often skewed upward by the tech sector and specifically the FAANG+ stocks.

When major indexes such as the S&P 500 are rallying, an increasing advance-decline line can confirm the trend throughout the overall market as opposed to one sector or even an industry of stocks carrying the rest of the market. Further, because the S&P 500 index is market cap weighted, the advance-decline line counts all components of the S&P with equal weight. Technical analysis like this is imperative to use, however it is still important to watch economic data such as job numbers and unemployment claims.

Unemployment Still Matters. A Lot.

To further understand a macro view of the market, it is important to review traditional data points that typically drive market moves such as weekly jobless claims and monthly unemployment figures. Weekly jobless claims are released every Thursday morning and the market tends to react to the actual numbers as compared to the estimates.

Although it is not easy to predict what the actual numbers will be, it is important to know what analysts are predicting for the weekly trends. In early August, jobless claims reached the lowest level since the start of the pandemic and the market reacted accordingly by opening higher than the previous close. Unemployment numbers are released monthly, on the first Friday of the month, and although the U.S unemployment rate dropped for a third straight month to 10.3%, the decrease lagged the previous two months.

The slowdown in the increase of jobs added in July can be attributed to a spike in COVID-19 cases in states that reopened and the 10.3% unemployment rate remains one of the highest since World War II.

The world is experiencing something that we haven’t seen for 100 years and the market certainly reflects this uncertainty.  Though there are hundreds, if not thousands of technical indicators and economic reports that traders use to predict market movement, the advance-decline line as well as unemployment data can help develop an educated opinion on how the market will move in the days and weeks ahead.

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

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