Every day we are bombarded with an inexhaustible list of information about politics, the economy, science, advice, health, food, and many other subjects. This information comes to us from “official sources” like government agencies that collect and disseminate data, traditional broadcast news, alternative news & information sites that reside on the web (like this one), Think Tanks, political parties, blogs, print and online new papers, and the list goes on. We need this information to make both important (and sometimes trivial) decisions about our lives. What kind of car should I buy? What should I have for dinner tonight? Should I buy a house or rent? Where should I (or the kids) go to school? What sports should we pursue? Turn on the TV or go online and you will find facts and opinions that affect the choices we make.
Here at TheOptionsEdge.Com, we focus on finance, investments and the investment decision-making process. We make every attempt to be as transparent as possible for two very important reasons. (1) We want our readers to understand our process and our way of thinking. This way, they can understand and evaluate our argument/thesis on its merits. To be a good investor and capture high rates of return, you need to be informed and you need to think for yourself. (2) While Michael and I are investment professionals who spend a good portion of our day evaluating investment opportunities, most people dedicate their efforts to their jobs, family and various daily activities. Our goal is to education people so that they can make decisions that are right for them.
One of the important activities investors go through is the collection and interpretation of data, facts, and opinion that we come across every day. Within that vein, we came across some articles describing the New Home Sales and this got us to thinking about the process of data interpretation. With so many competing sources of information out there, many people who write blogs and online newspapers, be they traditional or alternative news sources, use “emotional” language to grab people’s attention. A good example of this is the New Single Family Home Sales. The data showed that April’s new home sales fell 11.4% on a seasonally adjusted basis to 569,000 units annualized. Consensus estimates predicted by mainstream economists was for sales of 610,000 units. We saw a number article suggesting the sky is falling. They use words like, crash and plunge which are designed to grab people’s opinion. One might have a knee-jerk reaction to sell home building stock or buy put options on the same. But is this an appropriate action given the state of the housing market? Well, let’s take a look at a chart of new home sales.
The chart above shows the annualized new home sales as reported on a seasonally adjusted basis from the U.S. Census Bureau. As you can see, new home sales are growing within a very controlled and disciplined trend channel. I do not know about you, but I do not see a crash or a plunge. What I do see is some “noise” within a bullish trend. I raise this issue because it raises an important issue for investors. Never interpret a number in isolation. To effectively use data one must judge it in context. Doing so can help avoid a bad decision and may help take advantage of short-term market price action. If one were to see an emotional headline, witness a violent price move as a result of that data, a trading opportunity can present itself. If in this case, you were bullish home builders and looking to buy their shares, this is the kind of situation where the market can give you a small window to buy shares at a discount. Just a little something to think about.
