Blog : Why Data Worries Are Overblown

by Ed Zwirn on December 5th, 2013

Those of you who had fortitude enough to plow through the Penny Stock Week blog I posted on Monday were duly warned about the large amount of economic data with which investors have been bombarded this week.

And with the stock market being positioned at all-time highs as of last week, it may have been a foregone conclusion that investors, many of whom are already sitting on huge gains, would react with even more sensitivity that usual to the latest clues about the direction in which the economy is headed.

Continuing a four-session losing streak which began with Black Friday's abbreviated post-Thanksgiving session, stocks have reacted badly to a set of strong economic reports said to cast fear, at least into the hearts of some investors, that the U.S. Federal Reserve will think the economy is heating up and curtail its $85 billion monthly quantitative easing sooner than they would have thought before Thanksgiving.

Monday and Tuesday saw the release of relatively strong reports on construction spending, auto and truck sales and new home sales. These were seized on by traders as evidence that the Fed would pull the rug out from under the stock market.

The upshot this week so far has been a 1.2% drop in the Dow Jones Industrial Average, making it likely that that index will see its eight-week winning streak come to an end soon. This mild malaise has been seen in the broader market as well, particularly penny stocks, with the NASDAQ down 0.5% and the penny stock-rich Russell 2000 off 1.9%

But, assuming in fact that the market's bearish tone has been driven by data concern, the concerns, at least about the news we have received so far this week, are overblown and may actually represent a buying opportunity.

For one thing, the major report to have spooked the market so far this week, construction spending, ceases to be an indicator of economic pickup if you look at its particulars. True, the 0.8% rise in October was higher than expected, and represented the highest rise since May. But this gain came entirely from the government sector, driven by an 8.5% rise in educational construction, while private construction actually fell 0.5%, hardly the stuff that overheating economies are made of.

But beyond the particulars, people who really believe that reports like these could indicate an imminent reversal are barking up the wrong tree. Barring anything really weird happening between now and then, anybody with any common sense is bound to believe that the Fed won't commence tapering before March, and the only indicators that can really change this would be the November jobs report due out Friday. The Fed has repeatedly set the unambiguous goal that quantitative easing will remain on track as long as the unemployment rate remains above 6.5% (and is considering lowering that to 6%) and inflation remains low.

Both of these conditions are likely to remain in place for some time. Inflation, for one, has been so low for so long that it hardly bears watching. This Friday's jobs report would have to be steamy stuff indeed before it reaches a level sufficient to change the Fed's game plan.

Given the extreme unlikelihood of any shift of the Fed game plan, the best way to trade into this market would have to be to treat the good news as good news: The stimulus isn't going to change anyway, so you might as well bet that your penny stock will receive a boost from whatever positive news comes out about the economy.

Doing December Due Diligence (Feng Shui style)

"GOOD LUCK EVERYONE !!! This year December has 5 Mondays, 5 Saturdays and 5 Sundays. This happens once every 823 years. This is called money bags. So share it and money will arrive within 4 days. Based on Chinese Feng Shui. The one who does not share, will be without money. Share within 11 minutes of reading.
Can't hurt so I did it. JUST FOR FUN."

Maybe "just for idiots" would be a better description for this "share" posting I read today on my neighbor's Facebook page. I have reproduced it here not out of concern for my fortune over the next few days, but as an example of how easy it is to debunk BS, whether it is contained in a tout about a penny stock or fake Feng Shui good luck wisdom.

And who am I to say that this wisdom is fake? Did I take the time to figure out whether "money bags" actually only occurs only once every 823 years or research the linguistic import of the characters eight, two and three in Chinese? Actually, I looked at the calendar on my computer and quickly discovered that there are only FOUR Saturdays on the plate for December 2013.

As Peter Leeds has pointed out many times in his media interviews and books, it may seem easy enough to act on stock tips and other "information" passed on to you by others, but there is no substitute for doing your own research. This can sometimes prove daunting, but in many cases a simple look at readily available information (as in the example above) can often suffice to detect mendacity and save you the trouble of probing even further. P.S. Share this blog within 11 minutes if you want money to arrive within four days.