| Market Reaction to Unemployment Data - Part 2 |
The sister report to ADP's unemployment release came out this morning showing a loss of 84K jobs. This report was from the Bureau of Labor Statistics and analyzes the labor market in a similar way but through a different sample method than the ADP report. The report went further to reveal that unemployment is at a 5 year high at 6.1%. Despite the negative tone, stocks were mostly up for the day.  This is a good illustration of two things. First, it shows that analysts, writers and reporters are prone to making causal relationship-errors between the market and fundamental news releases and second it illustrates my point about how the labor reports can not be taken very far as a predictor for short term market behavior. Articles and commentary about "what" moved the market are only released after the market has moved because no one really knows why it moved. If the ADP report of 33K lost jobs resulted in a 300 point decline on the Dow why wouldn't the BLS report of 84K lost jobs push the market down further? In fact, the market indexes were up today. The financial media wants to provide an answer to day-to-day market behavior because that is what readers what to know. Telling your reader that some questions are unanswerable is not usually acceptable. Therefore causal relationships are reported that do not prove to be predictive in the future. If you feel, as I do, that labor reports (among many other announcements and news events) are unreliable and not very predictive on a day-to-day basis then why bother with the information at all? The reason we reported on this announcement and used it as a case study is because we feel like traders and investors should understand that the news rarely tells the whole story and sometimes it is not a matter of how you should react to a particular announcement but whether you should react at all. Understanding when a response is needed or not needed will help you reduce your own self-induced account volatility. Most short term movements in the financial markets can almost fit the very definition of random behavior. We do know however that market action over the long term is not random at all. Therefore, the long term trend of a particular news announcement may actually be useful in ways that the individual releases themselves are not. That means that a long term trend of lost jobs in sequential labor reports does help us predict and therefore manage a market downturn. Since the beginning of 2008 the BLS numbers have shown negative growth in non-farm payrolls. That trend followed a year and a half of a downward sloping growth curve in new jobs added. The data becomes much more reliable when looked at over time because the total sample set is much larger. We can use this information to manage our own investing activities. A slowing growth curve in employment and a series of negative releases helps us to know when risk control is becoming more important and why it may make more sense to adjust a portfolio's balance further towards conservative investments in 2008 than it did in 2005. In the video below I will look at why and how this data can in fact be useful in our everyday trade management. What do you think? Is the BLS report more B.S. than traders and investors assume? Charting provided by MetastockPro. For a free trial, click here.
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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