The Next Few Days Will Decide The Direction of The S&P 500 For 2013
INDEXDJX:.DJI, INDEXSP:.INX, NYSEARCA:SPY, NYSEARCA:DIA, DJI:DJI, CBOE:SPX, NQ:COMP, NY:XAX Related posts: How Do You Decide Which MLP To Buy When Not All MLPs Are Created Equal Check The Temperature Of Sectors For Clues On Short-Term Direction Global Economy Warning: Baltic Dry Index (BDI) Headed In The Wrong Direction The 401(k) State of The Union: Moving In The Right Direction S&P 500, Dow Jones Industrial Average, and NASDAQ May Now Pause For Several Days

bearbull21Mike Burnick: Stocks last month posted the worst performance since May 2012.

The benchmark S&P 500 Index (INDEXSP:.INX) fell 3 percent on concern about an end to the Federal Reserve’s four-year stimulus program and possible U.S. military intervention in Syria. But just a few weeks ago, the index had rallied an impressive 21.5 percent for the year. So will this decline continue or will a stronger economy propel stocks through the rest of 2013?

Investors will be closely watching key economic indicators and the Fed’s policy meeting, all coming up in the next two weeks, for the answer. Federal Reserve policy makers meet Sept. 17-18, during which time Chairman Ben Bernanke may say he plans to “taper,” in his words, the central bank’s $85-billion-a-month quantitative-easing program.

The Fed is on record saying QE is dependent on an improving economy; specifically, the unemployment rate and inflation. That’s why the talking heads on CNBC will be working overtime parsing every snippet of data this week, including: Manufacturing, construction and service-sector reports, and especially August employment numbers set for release Friday.

Investors shouldn’t read too much into how the Fed may interpret this week’s economic data.
Investors shouldn’t read too much into how the Fed may interpret this week’s economic data.

As the days go by, expect volatility to remain elevated. The Chicago Board Options Exchange Volatility Index (VIX) surged 22 percent last week to the highest level in two months. As the Fed meeting dates approach, the talking heads will try to handicap Bernanke’s next move, but I would caution investors not to read too much into the economic data itself.

The truth is there isn’t a strong relationship, or correlation, between any particular economic report (good or bad) and the near-term performance of the stock market.

For instance, there were several positive surprises last week, including housing-price gains, better-than-expected consumer confidence and a sharp upward revision to second-quarter gross domestic product.

Still, on the day of the consumer confidence report, the S&P 500 dropped 1.7 percent on its way to a weekly loss.

In fact, there is a small inverse correlation — minus 0.21 — between GDP growth and equity-market returns over the next year. Stocks can, and often do, struggle when the economic data look rosy, and the reverse is also true, with stocks often posting their best returns when economic data look dismal. Just think back to 2008 and 2009.


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An indicator with a positive correlation with stocks is the rate-of-change in the data, as measured by the Citigroup Economic Surprise Index (above).

When most economic reports are better than expected, the index rises, and stocks tend to follow. After bottoming in June, the Citigroup Economic Surprise Index has been climbing, and the S&P 500 has followed — until recently.

You can see in the graph that the August pullback in the S&P 500 corresponds with a dip in the surprise index, which means that negative economic data surprises have been increasing lately.

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