And then the market rallied up to new yearly highs. Now take a look at their explanation: Take report in stride?. Suddenly there was a pleasant surprise in the numbers. Keep in mind that this "surprise" is the same number in the morning that showed that the US economy has lost 85,000 jobs in December. Once again, reporters who know very little about the market try to fit the news to market action. This is a great example of how market psychology rules price. The market psychology now is to buy whenever there is a favorable buying opportunity, such as today.
On a side note, the inverse correlation between the market upmove and the dollar's downmove had been well documented by many of the media outlets. Just recently in the past few days though, it looks as if the market and the dollar have both been moving in the same direction. This could be a sign of a the end of this correlation. I have provided a link that maps both the market and the dollar: Market vs Dollar.
Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss.
I am glad you brought up the job numbers piece of news. I understand that the point about market creating news to explain itself, but I've always wondered why bad job numbers affect the market across the board. I mean the job numbers are nation wide numbers right? And we all know that some industries or regions do better than others. If that's the case, then is what we have here a situation where traders are trying to game what every other trader is going to do, and act accordingly, which ends up creating a self fulfilling prophecy?
ReplyDeleteCan you share your thoughts on that phenomenon?
Well Steven, since the American economy is especially dependent on consumer spending, jobs are a very important number to gauge the health of an economy dependent on discretionary spending. This is especially true for the American economy versus other emerging markets because it is well-documented that our manufacturing and therefore, export industries, are no longer an integral part of our economy.
ReplyDeleteAnything beyond this explanation and I would be making stuff up. But as you know, I view all these fundamental numbers as "excuses" to move the market in favor of the overall direction. For example, this "bad" employment number was a great way for institutions to load up with even more stock for the intraday upmove and hopefully, a longer term persistent trend.
Thanks for the explanation on why the job # is important. I guess I still don't understand the correlation between the job market and the performance of an individual stock. When a trader sees the news about the job market, does he go "hmm....bad job report, i think i should sell some (insert stock name) shares."?
ReplyDeleteAlso, with regards to the second paragraph of your explanation, I wanted to clarify, do you mean that institutions see this "bad job news" as an opportunity to buy low?
Hey Steven. The markets have always had some type of reaction to these numbers, whether a big sell order or big buy order. What is important is not the initial move, but whether that move is sustained. I cannot accurately tell you that traders just decide to sell shares because of a "bad" report because unless if you are the one pulling the strings, you never know. But if I were to venture a guess, I would guess that this initial move is done by algorithmic programs that react to the number, based on whatever parameters the institutions set. So they would actually have programs that read the data and react accordingly. Hey, for all I know, there might be fundamental funds out there who do base their buy and sell orders on these numbers.
ReplyDeleteIn regards to why this number affects individual stocks, if something affects the overall S&P, Nasdaq and Russell indexes, a vast majrotiy of the time, stocks in these indexes will also be affected. This is just the nature of the market.
And yes, I do mean that the institutions saw this news as an opportunity to buy low.
I will chime in here and point out that US GDP is roughly 2/3 dependent on consumer spending, and that consumer spending is highly dependent on the country's labor market. In addition, mortgage/loan/credit card delinquencies are all highly dependent on the state of the labor market as well. Once someone loses their job, they lose their primary source of income and therefore have to spend less and will have a higher probability to default on their debt. So the worse the labor market, the worse the general economy, and in particular, the worse certain debt assets will fare (higher default risk priced in). So yes, unemployment has a farely significant impact on the overall economy, as well as particular debt markets. As for equity markets, since they are theoretically priced for future corporate earnings, a weaker economy will also have a direct impact on stocks, particularly higher beta names.
ReplyDeleteHowever, just because the headline unemployment rate remained at 10% and Dec non-farm payrolls (NFP) fell by 85k, does not necessarily mean there is currently no improvement for the labor market or the economy. If you want to get a forward looking gauge on unemployment, you have to look at leading indicators such as temp hiring and rolling 4 week average initial jobless claims, which have been on a tremendous rise and fall respectively. So there are certainly some indications of improvement. In addition, the ISM indices have both been pointing to overall economic growth, and the consensus y-o-y real GDP growth for the 4Q is looking strong. The reason I bring this up is to explain why Yahoo Finance headlined that traders were "taking the disappointing unemployment report in stride." Big institutional investors know their economics, and will know that the headline 10% unemployment rate was, if anything, largely expected. The NFP # was a bit disappointing, but the number has definitely shrunk from a couple of months ago and is also still subject to revision, meanwhile Nov's NFP was actually revised to positive job growth. The way I see it, the initial market dip was a bit reactionary to the headline numbers, but once the deeper analysis was done, or perhaps once prices were allowed to fall to more attractive levels, knowledgeable traders came in to buy on the cheap. However, by reading the Yahoo article, this is not completely clear since it seems like the author was depicting a scenario in which traders were just shrugging off bad news and buying into a bull market out of disregard. Which leads to the greater point I want to make here, and that is to echo Henry's point about how most of the financial news sources do try to tailor fit an explanation for the markets that does not fully reflect the complete story that's happening. Yahoo Finance and CNBC are the worst at this, and I typically consider them the equivalent of financial tabloids.
Thank you for fleshing out the importance of the number Barry. Greatly appreciated!
ReplyDelete