Divergence and the index of economic surprises
The world-wide Chinese-made factory is operating with increasing downtime. Business activity in the manufacturing sector of China falls below 50 in August, and in services it is even worse. The economic reports have not met the market expectations for several months *).
Consumption from the USA does not grow for 4 months. Since July, economic data has come out systemically, but worse than expected. However, everything is at maximum values - house prices in the USA, Britain, Canada and the EU countries, capitalization of stock markets, etc.
Known in the West and new in Russia, the index of economic surprises was introduced into wide circulation by Citi analysts, and is calculated on the basis of economic indicators for a country or region: unemployment rate, GDP dynamics, inflation, etc.
Each of them is assigned a weight.
When the latest data on the indicator comes out, the compilers of the index compare it with the consensus forecast published the day before by some major news agency, for example Reuters. If the actual figure is better than the forecast, then the value of the index is adjusted upwards taking into account the weight of the indicator.
The indices show how the market participants’ ideas about the state of the economy diverge from the real state of affairs. Hence their practical value follows.
If optimism reigns on the stock exchanges, and the index of economic surprises falls (that is, surprises are mostly negative), it means that the expectations of the traders have become detached from the fundamental factors. And sooner or later this will lead to a correction.
And if the mood is bad, and the index, on the contrary, stubbornly stretches up, then it is logical to wait for a bullish market trend. History shows that a stock reversal occurs about a month after the trend in the Economic Surprise Index changes.
Today we see that the indices are moving down everywhere.
And that will be?!
- ) Based on materials from Egor Susin
