The stock market is constantly bombarded by news — earnings, economic releases, political developments, and so on. Given the market’s dynamic nature, anyone focusing on just one pattern or piece of economic data is likely missing something.

The following study creates an index based on 30 U.S. economic releases by comparing market expectations to actual reported numbers for each report every day. In theory, this so-called "economic surprise index" should act as a barometer of market sentiment. Large positive index values should reflect optimism about stocks, and large negative values should reflect bearish views on the market.

After describing how to create the economic surprise index, we measure how the S&P 500 tracking stock (SPY) behaved after the index reached extreme lows and highs over the past 10 years.