A Classic Case of Good vs. Bad

In the midst of all the news we’ve been receiving regarding Japan’s earthquake, the unrest in the Middle East, the G7′s currency intervention, and even employment figures from the U.S., we can make sense of the current market theme by sorting out the good news from the bad to get a better view of the U.S. economy.

I like to analyze markets the same way I eat my trail mix, so let’s start with the good bits first! Generally speaking, the U.S. economy has been picking up steam. We’ve been seeing pretty solid improvements in some of its biggest sore spots lately.

Employment, for one, has been on the rise. The U.S. non-farm payrolls (NFP) has recorded gains for five straight months now, causing the unemployment rate to decline drastically from 9.8% to 8.9%. In fact, we even witnessed a better-than-expected rise of 192,000 in jobs earlier this month. Y’all can’t tell me you forgot about that already, I just wrote about the non-farm payrolls a few weeks ago!

As for more forward-looking reports, things are looking brighter as well. The Philly Fed manufacturing index hit a record high of 43.4 just last week, almost 10 whole points above last month’s score. This just goes to show that businesses are feeling more optimistic, which could be a sign that a stronger recovery could be waiting just around the corner.

And then we have the heart-warming story of the Group of Seven (G-7) coordinating to intervene in the markets. Makes you feel all warm inside knowing the world’s biggest economies are working together and not duking it out, right? But you have to understand, this isn’t just for show. It’s a unified effort to bring confidence and stability back into the markets.

Actually, this is probably one of the reasons why U.S. equities have been on the rise lately. The Dow Jones industrial average recently just crossed a critical psychological handle at 12,000, for those of you not in the know!

But of course, not all things end happily ever after. There’s been bad news recently, too.

First, tensions in the Middle East continue to threaten the supply of oil. As a result, oil prices have rocketed to new highs, much to the dismay of the average consumer… and dollar bulls.

Second, there is the Japanese earthquake-tsunami-nuclear crisis. This is a sad event for the world as thousands of lives have been claimed and billions of dollars of infrastructure was left in ruins.

Third, CoreLogic, one of the leaders in real-estate information, reported that housing prices in the U.S. have fallen by 5.7% year-on-year. Couple this with the weaker-than-expected existing home sales on Monday and the 20% year-on-year decline in building permits, the housing market doesn’t look very healthy.

Now that I’ve heard the good and bad news… What now?

Right now, all eyes and ears are tuned in to developments on unrest in the Middle East and rescue and cleanup operations in Japan. The markets seem to be more focused on global developments, which have been dollar-negative lately, rather than the economic data from the U.S., which has recently been showing a lot of promise.

With that in mind, you should keep a watchful eye on what’s happening globally, and not just focus your eyes on reports pouring out of the U.S. If you’re one of them traders who like longer time frames, then that means you should keep close tabs on what’s going on in the Middle East and in Japan.

Recently, risk aversion has been fading away as concern over Japan has been easing. In turn, this has shifted trader favor away from the USD to the commodity-based currencies. Watch your charts closely though, as conflicts in the Middle East have potential to escalate, which could affect risk sentiment in the markets. Heck, it has already pushed oil prices above the $100 mark again!