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Second-Tier Indicators Impoverish Proponents

Trading on the NAPM was a bad bet last week.
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There's no consoling the market these days.

The major averages are closing in on their April lows, third-quarter growth is in danger, and the consumer is being widely mourned?all because of a report Friday that showed

joblessness at a four-year high.

That report, which depicted a troubled manufacturing sector, wasn't the only indicator to come out last week -- although it was definitely the worst. Tuesday's National Association of Purchasing Managers' survey, on the other hand, was rosy, reflecting improvement in new factory orders, production and inventory levels. The once-obscure NAPM report was thought to be the kind of wonky, predictive indicator new-breed investors embraced.

And anyone who banked on it got killed.

"Saying the bear market is coming to an end because of a random day the NAPM index was up is not enough," says Prudential Securities' market strategist Larry Wachtel, who described Friday's selloff as "horrific." "We have to have two solid months of data rather than one single event."

Inspired Divination

Reading the tealeaves gets harder every year. Investors see more data than ever, from fund-flow tables to money supply readings to all manner of oscillator. Some numbers clearly wield a bigger ax; witness the short-term impact of the jobless report. But sometimes it's also in the way you swing it.

"Before the Federal Reserve was lowering rates, the market took good news as bad news and bad news as good news as it was hoping for additional Fed easing," says Charlie Reinhard, chief markets strategist at Lehman Brothers. "But since the Fed has been lowering rates more aggressively, the market's been treating bad news as bad and good news as good?it's looking for further signs of earnings and economic stability."

Lynn Reaser, chief economist and senior market strategist at Banc of America Capital Management Group, believes a discerning investor tries to look forward.

"Investors should be focusing on the key leading

ones," she says, pointing out that unemployment data is stale since companies usually give 60 days' notice to terminated employees. "Individuals need not be swept up in the negative mania that's sweeping the market at this point."

There may be a time-lag associated with the employment data, counters Michael Strauss, market strategist at Commonfund Group, but "its weakness is mainly due to fact that business spending is very weak and you getting companies reacting to slowdown that they've already experienced." Strauss also notes that that today's layoffs endanger tomorrow's consumer spending.


Lately, the market is uninterested in practically anything claiming to be good news, for instance the Conference Board's U.S. Leading Economic Index. The gauge, which tracks 10 economic indicators and is designed to look six to nine months ahead, bottomed in March and has advanced consistently since then. This trend points to "recovery in America's industrial activity early this fall," the board wrote in a Sept. 6 statement.

So why haven't stocks caught on?

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It's simple, according to James O'Sullivan, an economist at Warburg Dillon Read. The reading has climbed because of the "spread between the 10-year treasury

note and the fed funds rate is a component. When the spread goes up, it counts as positive as a steeper yield curve is associated with fed easing." But "how quickly that's reflected in economic activity remains to be seen," he adds, noting the stock market's "starting to lose a little patience."

Economic indicators like Friday's retail sales report, next week's data on business spending and inventories, and future jobless claims will continue to be important, says O'Sullivan. But what's his favorite economic indicator? "The market." As it slides, "it makes a meaningful recovery much more difficult. There's no question it's drop is sapping consumer confidence," O'Sullivan says.

You might think foresight would be at a premium on Wall Street. Just yesterday, research firm Raymond James raised its estimates and investment ratings on

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today, saying, "investors are reacting to recent negative news instead of looking forward."

"The focus of the market is purely short term," agrees Phil Dow, director of equity strategy at Dain Rauscher. "It's as if some of the great businesses in America are only as good as this quarter's report."

But for everyone who laments, someone else explains.

"The market is not going to turn on a dime and rally forth just because price-to-sales ratios have come down," Wachtel says. "A technical bottom is an oversold trading bottom,

while a fundamental bottom is the real thing, where there's a reason to buy and hold. That's a moving feast because it's dependent on the economy. And the economy's just terrible."