How To Trade A Strong October Payroll Report [Ford Motor …
The U.S. employment picture is getting brighter, much brighter, according to a regular Labor market report published Friday morning. Total nonfarm payroll employment rose by 204,000 in October, and the unemployment rate was little changed at 7.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in leisure and hospitality, retail trade, professional and technical services, manufacturing, and health care. Payroll numbers were well above analyst expectations of 120,000 jobs, while unemployment numbers were in line with expectations.
Friday’s employment report comes follows another strong a strong GDP report yesterday-GDP up by 2.8 percent, ahead of analyst expectations. A Brighter U.S. economic picture that’s certainly good news for both the Main Street, but for Wall Street things become a little bit complicated.
On the one side, a stronger economy will give a big boost to consumer spending and earnings; and that’s good for stocks. On the other side, a stronger economy is certainly bad news for U.S. Treasury bonds and precious metals, as it will eventually put an end to the several rounds of QE that have been providing investors with plenty of cheap money to chase after all three major asset categories: stocks, bonds and commodities. That could be explain a big decline in all asset categories yesterday. What should investors do?
Major Equity Indexes at 9.40
Index
Friday’s
Performance (%)
3-Month Performance (%)
12-Month Performance (%)
SPDR S&P 500 Trust (SPY)
+2.38
+3.5
17
Powershares QQQ Trust (QQQ)
+0.38
+6.2
12
SPDR Dow Jones Industrial Average (DIA)
+0.02
+0.08
15
Major Precious Metals ETFs/Stocks Last Week
ETF
Friday’s Performance (%)
3-Month Performance (%)
12-Month Performance (%)
SPDR Gold Shares (GLD)
-1.65
2
-23
like iShares Silver Trust (SLV)
-0.91
10
-31
Freeport-McMoRan Copper and Gold (FCX)
-0.24
22
-12
1. Stay away from precious metals that are QE sensitive, but don’t short them, as the market may have already discounted the worst scenario. Aggressive investors may want to trade them on the long side a ay consider trading them on the long side.
2. Stay away from momentum stocks. Momentum investing is a strategy based on hype about an investment theme, a new product or a new industry that captures and captivates the investor mind — at times when money is cheap. In the late 1990s, the theme was telecommunications and networking, with momentum funds flowing into companies like Ciena Corp. (CIEN), JDS Uniphase Corp. (JDSU), Corning, Inc. (GLW), and Ariba Inc. (ARBA). Now the theme is social media and web-based companies, like Netflix, Inc. (NFLX), OpenTable Inc. (OPEN), and LinkedIn Corp. (LNKD). Momentum investing can be very rewarding as long as it lasts. But it can result in hefty losses once it fades away, usually when liquidity dries up.
3. Stay away from U.S. Treasuries — and Treasury ETFs like TLT. Though U.S. Treasuries are the first investment to come in mind when the economy heads into recession, this time yields are already near record low levels, so any gains from here will be limited.
4. Buy an ETF that is short on U.S. Treasuries like the ProShares UltraShort Lehman 20+ (TBT) or ProShares UltraShort Lehman 7-10(PST). The problem for investors, however, is that both funds bet against the daily price movements of U.S. Treasuries, and therefore, they do not make good long-term bets.
5. Buy cyclical stocks that may benefit from the two strong employment reports. I particularly like Ford (F), as I discussed in a previous piece.
6. Buy portfolio protection, using puts on SDR S&P 500 or calls on iPath S&P 500 VIX ST Futures (VXX).
7. Stay away from high dividend stocks, which have been trading like bonds–higher Treasury yields will make these stocks less appealing.
A few words of caution: While Fed tapering is eventually imminent, it cannot be timed. That’s why investors should place these bets gradually rather at once, following closely the indicators that may induce the Fed to taper like the unemployment rate.
Source:
How To Trade A Strong October Payroll Report
Disclosure: I am long FCX, QQQ, VXX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Short NFLX (More…)
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How To Trade A Strong October Payroll Report [Ford Motor …
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