Investors typically observe the real world to make inferences about trends in asset prices. I think it's sometimes helpful to reverse that train of thought, and imagine a world based on market price trends.
This won't tell us what will happen, of course, but does bring the prevailing expectations into sharper focus. And that in turn informs which near-term data points really matter, and which can be safely discounted.
For example, one reason stocks were down again Friday, after a two-day relief rally, is that China's reported GDP growth slowed to 8.1%. The news is taking its toll on the industrial and resource sectors.
We could argue about whether the data has already been contradicted by the stronger Chinese economic indicators for March, or whether it will give the authorities the prod they need to keep easing lending conditions and curbs on speculation in housing.
But is China what traders have really cared about lately? Not according to StockCharts Technical Rank, which has become my daily go-to guide to the market's gradually evolving assumptions.
It's a straightforward gauge of a stock's momentum over three time frames, measuring rate of change as well as position relative to key moving averages, and weighing the action of recent months a bit more heavily than that of recent days. (You can see the full recipe here.) And StockCharts daily ranks stocks within each of the benchmark S&P indexes for large caps, midcaps and small-cap stocks, as well as the ETF space.
The future these rankings currently describe is one in which a US real-estate recovery has translated into a lending and consumer spending boom, alongside stepped up investment in technology.
Farfetched, I know. May never happen, given just the known risks like Europe, China, Iran, the cost of oil, and the fiscal drag likely next year in the US (barring a decisive election outcome).
And yet the market's been plotting just such a scenario for months. The two perkiest S&P 500 stocks remain, according to StockCharts, home builders PulteGroup (PHM) and Lennar (LEN), notwithstanding the profit taking of the last three weeks.
Then come the growth gorillas: Apple (AAPL), Priceline (PCLN), and Starbucks (SBUX), and then more stocks geared to the housing recovery: Regions Financial (RF), Lowes (LOW), and Sherwin Williams (SHW). More techs, retailers, and financials follow those.
Energy and resource plays bring up the bottom, alongside failing retailers like Best Buy (BBY) and Sears (SHLD), as well as former high flyers Netflix (NFLX) and Amazon (AMZN), which simply can't compete with the biggest and best techs on valuation.
Financials, techs, and consumer discretionary are also the leadership groups among the midcaps and the small caps. All this suggests that US consumer spending and housing data, which has been notably cheerier than global macro indicators of late, will continue to guide the market in the near term, barring a change in the fundamentals.
With that in mind, perhaps we should be more worried about the selling in US banks, despite results that beat expectations and surprising revenue growth. Or we might, if the strong technical charts of stocks like JPMorgan (JPM) and Wells Fargo (WFC) signaled anything more than routine profit taking.