The Data Point That Matters the Most for the Direction of the Stock Market

By TradeSmith Editorial Staff

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Data can often serve as a collection of jigsaw puzzle pieces that, when fitted together, create a clear image of something. But for the economy, there are a lot of data puzzle pieces that conflict and don’t fit nicely together — and there’s no picture on the cover of the box to tell you what it’s supposed to look like.

For instance, the number of S&P 500 companies that used the word “recession” in their earnings reports dropped by 20% from the third quarter of 2022 to the fourth quarter of 2022. This would appear to be a good sign: If fewer executives are worried about a recession, it could mean the economy is on more stable footing.

Job creation also surpassed expectations once again in February with 311,000 jobs added, toppling the estimates of 225,000. Consumers are also proving resilient even with high inflation, as spending increased 1.8% in January.

If these were the only pieces of data you were looking at, you would think the economy is humming along just fine.

But the other pieces of the puzzle compose a much different picture. Personal debt increased in the fourth quarter of 2022 to $16.9 trillion, up roughly $1.3 trillion from the previous year. There was also an increase of delinquencies for mortgages, auto loans, and credit cards. People may be spending more, but they may also be using more debt to fund those purchases.

Something else to worry about is the fact that the rate at which people are saving money has hit its lowest point since 2005. If people are racking up debt and don’t have the savings to pay it off, that’s troubling.

Add into the mix the recent issues with the banking industry, and it’s difficult to get the real picture of what’s happening.

As I was talking with Quantum Edge Pro Editor Jason Bodner about all this, he assured me that there was no need to suffer from information overload, as he believes just one data point should be focused on the most.

The Federal Reserve’s Data-Based Decisions

Uncertainty creates volatility, and Jason said that what can help ease uncertainty and reduce volatility is knowing what the Fed plans to do in its battle against inflation.

Because the Consumer Price Index (CPI) gives the Fed an indication of whether raising interest rates is helping to cool inflation, the CPI is the one data point to pay attention to the most. (The CPI numbers are expected to be released at 8:30 a.m. today.)

If the data shows that inflation is going down, the Fed can eventually start to consider easing up on the rate hikes and eventually cut rates, a scenario that Jason believes could happen in 2024.

If the data shows that inflation is higher than expected, the Fed will believe it needs to continue raising rates.

That’s a valuable outlook from Jason, but of course, the most important thing to know is what to do with that information.

Jason believes that stocks will experience volatile price swings in the near term, as no one is certain of the Fed’s next few moves. However, he also believes that this is creating a stock picker’s market, which is actually good news.

If you just wanted average returns, you would be investing in an index fund that tracks one of the major indexes, and you likely wouldn’t be reading this.

But you probably want to go beyond average and beat the market, something Jason shows people how to do through his proprietary trading system.

For instance, Jason released in a report at the end of February that Crocs (CROX) — the maker of those odd-looking but extremely comfortable rubbery shoes — jumped out to him.

CROX had a fantastic Quantum Score of 86.2 over the first two months of the year, making it the highest-rated Discretionary stock in his system. (The Quantum Score is Jason’s proprietary number for ranking stocks.) Its fundamentals had a strong score of 79.2, thanks to good sales-and-earnings growth, solid profit margins, and a decent valuation even with the stock’s run over the past 12 months.

With that kind of performance, it’s no wonder the “stocks” technicals were also strong, with a score of 79.2. Its sluggishness over the last month is the only negative — if you can even call it that.

And you can see that Big Money has made its presence known on multiple occasions (illustrated by the green bars in the chart below) over the last six months. That’s a good indicator of more Big-Money buying to come.

Jason views CROX as a stock that is setting itself up as a buying opportunity rather than one to rush out and buy right now, but it is on his watchlist and could become a recommended investment in one of his trading services.