Trading: the importance of market movers

A data market mover is that data which, quite literally, moves the market. Over time, as the macroeconomic situation changes, market mover data change and therefore become more difficult to recognize, especially it is difficult to contextualize them at the "right" moment.

But how to spot a market mover? Why could it be useful for both trading and investing? Let’s see together what is a market mover, how to identify such data and, if necessary, anticipate it and how to use this information to implement our trading and investment strategy. In this historical moment we see, for example, how inflation and interest rates are market movers, i.e. how their exit moves the market; but we must take into account that in the short term they may be less relevant at the expense of another given market mover which, if anticipated correctly, could make a difference in the long run.

What is a given market mover and how to identify it

A market mover is an information the release of which determines strong market movements sometimes directional even in the long term. Its exit usually generates an increase in volatility in the short term and also establishes directionality in the long run. In essence, it is a fact that creates a stir and adjusts the market according to its "real" dynamics.

A given market mover is therefore a very important fact, we would say fundamental, but how to recognize a given market mover? The first thing to do, a task that every trader must carry out to define himself as such, is to carry out a macroeconomic analysis and relate it to the prices that the market is beating at that moment. Without a good macro analysis it will never be possible to identify a given market mover and its importance.

Once the macro analysis has been done, it is time to identify the anomalies and dissonances that are found within the same analysis, such as for example in the months preceding the outbreak of the pandemic, one could see a very strong pressure against of inflation thanks to the low rates that central banks have extended over time. Sooner or later inflation had to rise, so much so that today we find ourselves with very high inflation with central banks who find themselves forced to raise rates at a speed never seen before, a real emergency situation.

As you can see, even central banks get it wrong sometimes. In any case, once a macroeconomic anomaly has been identified, we can safely start with measuring the degree of anomaly to understand how much the data needs to adjust before becoming relatively harmless in the long run. This is used to understand the possible duration of the effectiveness of the data as a market mover, therefore establishing and measuring the difference between the current level of the data against the ideal level under normal conditions is fundamental to understanding the current state of the market. For example, in the current market case we see interest rates still rising as inflation begins to fall slowly in the US and remains relatively high in Europe. The inflation target for these two areas is 2%, currently in the USA we have inflation close to 8% while in Europe we have inflation at 10%.

This means that until we see inflation returning close to 2%, the inflation figure will always be a market mover figure. Attention, usually the data "talk" to each other, i.e. the inflation figure strongly depends on the level of interest rates and vice versa, therefore it is also necessary to see how and in which way interest rates are raised.

If we find ourselves at very high interest rate levels, therefore a central bank will not be able to raise them further, we could already consider the inflation figure as a figure with less impact if it were to fall, while it would have a greater impact if it were to rise. As you can see, the situation, once the usefulness of identifying a given market mover is understood, becomes increasingly complex and requires a relatively high degree of preparation at a macroeconomic level, both in terms of theoretical notions and at a practical level of market experience.

The market mover for traders and investors

Market mover data is the most important macro data within the financial markets, therefore their influence spans both the short and long term. For the short-term trader , market mover data is essential for volatility and risk management. If a trader knows that a given market mover is about to come out, he knows well that when the data comes out he can expect a certain volatility and, if he has done a good macroeconomic analysis which anticipates the outcome of the data in a certain sense, he can also identify interesting market dynamics such as understanding whether a movement is directional or if it is a short-term squeeze movement.

How to see a good macro analysis is also very useful for short-term trading. As far as the long-term investor is concerned, the greatest concentration is on the final outcome of the current data and possible projections of the same in the long term. Taking an example with the current situation, we can say that an investor will be able to start adjusting his bond portfolio in view of a possible economic slowdown resulting from the increase in interest rates or, for example, reduce the risk of his equity exposure or even better manage its liquidity based on other possible interest rate increases.

As you can see, also in this case, having a macroeconomic picture is of absolute importance. Let’s get rid of the idea that macro analysis is useless, macro analysis is only useless if it is done badly and above all if its result is not applied with reason within one’s investment strategy, sometimes used as a bet against the market mover figure (“betting on the fall in inflation”).

How to anticipate the market mover data?

This task is perhaps the most complex given that the degree of macroeconomic awareness must be high. In essence, it is necessary to study and know the basic macroeconomic dynamics in order to then experience them directly on the market. Theory is not enough as a result, anticipating the long-term market mover, in addition to an excellent theoretical knowledge of the main macroeconomic factors, requires direct experience on the market. Having these tools available, we can say that in order to anticipate a given marker mover, i.e. understand what will be the next figure to have an important influence on the market, we need to make real hypothetical scenarios and based on them understand what could move the market over the next few weeks/months.

For example, in the current situation, given the drop in inflation, the increase in interest rates, we could hypothesize that the next market movers could be precisely the GDP of the various countries with high inflation and immediately after, but with more importantly, the unemployment rate, a macroeconomic factor that is strongly linked with inflation and interest rates (see the Phillips Curve). As you can see, preparation in the trading/investment field must be high, in the sense that one must be constantly updated and in continuous study, therefore approximation, extreme simplification and the apparent ease of trading do not lead to any results. Let us remember in this regard that we must be aware of what we do to avoid incurring nasty surprises involving our financial life.

Original article published on Money.it Italy 2022-12-20 08:57:00. Original title: Trading: l’importanza dei market mover