An upside surprise in jobs report helped stocks, not bonds.

Last week we left off wondering what the jobs report had in store for us.  It turned out that it was a positive report in that over 30,000 more jobs were created than was estimated (210,000 est., 243,000 actual.)  I would consider anything 20,000 above or below estimates as a surprise report but to be honest, these jobs reports are rarely in line with estimates.  Many times we see large revisions of the reported number the following month.  But for the record, this was a positive surprise.

That 33,000 surprise above estimates helped stocks move up rather impressively on Friday.  As I mentioned on the message board last week, and in the market comments many times before, the market tends to reverse course when there is a .50% move in the market, up or down, on the day of a jobs report.  To drive this point even further, bonds yields were up .53% as well on Friday. When bond yields are up, bonds prices are down.  Bonds tend to be more sensitive to economic data and here they are moving down on the news while stocks are moving up.  This is troublesome for stocks.

While I noticed this phenomenon, as usual our friend Jason Goepfert at SentimenTrader.com took it a step further.  The chart he provides gives us an indication of what we could expect over the next several days.  The blue bars represent our current situation with stocks (S&P 500) up .73% and the 10-year Treasury Note yield up .53% (bond prices down) on Friday:

    
                          Chart provided courtesy of www.sentimentrader.com

Going out 10 to 15 days (2 to 3 weeks) the S&P 500 is up about half of the time but the average return is negative 1%.  That is well below a random 2 to 3 week period.

OK, so you get the picture.  Big gains in stocks as a result of a positive jobs report, particularly when the bond market did not follow suit, tends to set up selling opportunities.

I am sure it does not come as a surprise to you that I am expecting the market to pull back some.  Over the past several months I have been quite conservative on stocks and if you joined us during this period you no doubt believe that I am a very conservative investor.  But interestingly enough, in mid-2004 I was being accused of being way too aggressive. 

Things were very bleak for stocks at that time but I was pounding the table that market was trying to put in a bottom and that the year should end with a strong rally.  It did end the year with a 16% gain from August through December but I was early and caught more of the end of the downside prior to the rally than I would have liked.  I was called a lot of things by some of our readers who lost some money being in stocks before that rally began but one of the more common things people said was that I was too reckless with my account.  That was a tough time for TSP Talk but it did work out as we made a lot of money to end the year. 

Fast forward 18 months and now I see people on the internet referring to this site as, “Informative, but they are too conservative for me.”  The emails were more brutal during my aggressiveness in 2004 compared to the feedback I receive now about being too conservative so it leads me to believe that people are more forgiving when they make less money than they could have, rather than losing more money than they could have.

This feedback, both positive and negative, comes with the territory of making public predictions on the record.  I have gotten used to it and actually welcome it, as it has become a secondary contrarian indicator for me.  One of the more memorable and humorous comments I received when I was telling people to get into stocks back in mid-2004 was that a drunken monkey with a dartboard could call the market better than me.  Two days later the market bottomed and the 16% rally began.

I still use the same system, or series of indicators, as I always have and while they will not call every wiggle in the market or beat the market averages every month or even every year, it does seem to work over the long term.  This year I am lagging the market averages because of my current conservative outlook.  In 2005 the S&P 500 beat my return by 4.5%.  Yes, in retrospect I should not have been so conservative.  But between 2000 and 2005 my return has beaten that of the S&P 500 by 22%.  If you are always invested in stocks you will obviously have a return equal to that of the stock funds you are in. But the only way to beat the market averages is to be out of stocks when they go down.   

So we have a market that seems resilient as it hangs around the highs despite all of our yellow warning flags we are seeing.  The relatively sideways action since late November is doing a fair job of bringing the longer-term extreme bullishness readings, and overbought indicators back toward the neutral zone.  But we have still gone three years without a major pullback, which has only happened three other times – ever, and each time preceded a major pullback.

Knowing this, how aggressive do we really want to be?  I’d rather be patient and wait for some longer-term buy signal from my indicators.  As for the short term, it has been difficult to maneuver our TSP accounts quick enough to take advantage of the recent swings.  It seems to backfire on me more often than help.  I’ll leave that up to our professional trader, RevShark.  But I think any strength early this week is giving us another opportunity to sell.  Monday morning rallies haven’t held up well this year.

That’s all for today.  Currently 100% G fund.  Thanks for reading.
 

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