Citigroup US Economic Surprise Index: Don’t Miss A Great Buying Opportunity

| June 14, 2011 | 0 Comments

Lately, weak economic data is the storm cloud raining on investors’ parade.

But, just how bad is the economic data?  And more importantly, what should you be doing to profit from it?

Right now, economic data is coming up short of economists’ predictions at the fastest pace since the recession ended.

Let me show you what I mean…

Here’s a chart of the Citigroup US Economic Surprise Index recently published in the Wall Street Journal.

Citigroup US Economic Surprise Index

As you can see, the index has plummeted off a cliff.

In fact, since it reached an all time high of 97.5 in March, the index has fallen to its worst level since the depths of the recession in 2009.

You see, when the index reads zero, it means economic data matches up perfectly with economists’ predictions.  A positive reading means economic data is better than economists predicted.  And a reading below zero means economic data is worse than expected.

In short, economists don’t usually miss the mark as badly as they have recently.

Economic data has gone from much better than expected to much worse than expected in just a few short months.

This chart has a number of disturbing implications.

First off, let’s consider what this index measures… essentially it measures how good economists are at predicting the future.  Think about it… If economic data always lined up with expectations, then there would never be positive or negative surprises and the index would always read zero.

Obviously, economists won’t always be right.  But the volatility of the swings indicates how wrong the consensus is when economic growth speeds up or slows down.

Why?

It’s simple.  For the most part, economists consider what has happened to the economy over the last few months.  Then they make their predictions based on the economy continuing on the same trajectory going forward.

This is a dangerous game.  It leads investors to be overly optimistic after a few months of good economic data.  And on the flip side… It also leads investors to be overly pessimistic after a few months of weak economic data.

Now for the surprise…

You can use this information to your advantage.

Right now, economists are preparing to cut their projections for economic growth.  They always do this when the economic data weakens for a few months.  And we’ve already seen economic data weakening for more than a month.

As they cut their growth estimates, stocks will inevitably suffer from their depressing forecast.  But once they cut their projections… they’ve lowered the bar.  Then we’ll be in position for economic data to surprise to the upside.

Remember, economic data is relative.  I know this may sound crazy… Economic data isn’t good or bad without something to compare it to.

Once the bar is lowered, it will clear the way for economic data to surprise to the upside.  And that’s a formula for stocks to make another big push higher.

If you’re looking for a good opportunity to buy stocks, just wait for economists to cut their projections.  These guys are usually so far behind the curve, it’s usually a good sign better than expected economic data is about to fuel another bull market.

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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