How Economic Data Influences Trading

The US markets have navigated several economic data points with minor blips up and down and although the overall economic data points have been mixed, the DOW has managed to climb near the 10,500 level again and the S&P500 hovering near its 50 day moving average.

The true test will come on March 4 with the release of the unemployment report which carries a heavy weighting on the trading and will influence the markets in either direction.

We believe, based on the option trading we see, the economic data will not be favourable and as we spoke about last week the talk of double dip recession will come into play and many of the US equities that are trading at or near their 200 day moving averages will sell off over the next several months.

The overall mentality of the trading is being driven by economic data points and swings each day as if traders are starved for direction and a herd mentality to every bit of information is the only ignition to trading direction.

The chase to seek gains is crowding popular names and instead of pricing valuations based on company financials and macroeconomic information driving p/e levels, day trading and swing trading seems to be the mood of each trading session.

Last week we followed several equities and here is how they have done so far: RRGB, Red Robin Gourmet Burger was trading at $20 and currently trading this week at $21.50 which is good for a 7.5 per cent gain in 1 week.

We are still looking for a $22.50 but will settle for $22.00.

WEN, Wendy’s which was trading at $4.80 currently trading at $4.93 which is good for a 2.7 per cent gain but the real gain will be on March 4 when they release earnings.

Based on the option trading we are seeing a $5.15 target price is still attainable and that would yield an extremely healthy 7.3 per cent gain. UAUA, United Airlines last week was trading at $15.60 jumped up on GDP growth data and is now trading at $17.87.

We believe UAUA will still fall over the next several weeks as the unemployment report will create a negative view of consumer spending and therefore a selloff in UAUA. HOG, Harley Davidson has remained near the $25 level since last week, but as we will see with UAUA, a selloff with poor unemployment report is inevitable.

HUM, Humana is holding steady also from last week’s price of $47.00 but is a long term sell with the overall health care plan that is in the works.

Equities this week that have come on our radar recently based on our research and should move over the next several weeks: To the upside – SIGM, Sigma Designs, currently trading at $12.14 there is room to move to $13.50+ as the call option volume has been active for March with very little put volume.

To the downside – RIMM, Research in Motion Ltd is seeing active trading on the 65 puts and could drop soon. DRI, Darden Restaurants trading at $40.51, has seen increased put volume and a drop below $40 looks likely here.

As always, Good Luck investing.

Email the writer: