After the release of the monthly employment report, the stock market offered hope to the bears, and then the bulls, that the trend was in their favor. At the end of the day, it looks like the bulls have more strength to their arguments in the stock market. In the gold market, bears continue to have the upper hand even as news from around the world grows worse.
Stocks Shrug Off Bad News
Before the stock market opened on Friday, traders learned that the unemployment rate dropped to 7.6% from 7.7%, but most analysts attributed the decline to the fact that fewer Americans are working or looking for work than at any time in the past 34 years. When stocks opened, SPDR S&P 500 (SPY) was down about 1% and near its low of the day.
The full employment report is about 11 pages long with 25 different tables. It takes time to assess that much information and I think traders realized the data was not as bad as the initial headlines. As the day progressed, SPY recovered and closed down 0.45%, posting a loss of 0.96% for the week.
In the report, traders saw that revisions to estimates from January and February data showed 61,000 more jobs were added than previously thought. The direction of the revisions is usually consistent with the underlying trend of economic data. Upward revisions are usually seen when the job market is improving. No one will argue that jobs growth is spectacular, but it is steady and could support slow growth in the economy.
Among the most interesting headlines related to the employment report were the ones focused on the decline in the participation rate. Only 63.3% of Americans are working or looking for work, a number that has been declining for some time. I'm not sure why, but many headlines are telling us this is bad. When digging a little deeper into the data, it looks like the declining number of workers is largely related to long-term demographic shifts.
In 1980, only about 12% of Americans were older than 65. Now, 13.3% of Americans are over age 65 and 15% of the adult population is counted as retired. It seems safe to assume that the percentage of retired workers has risen as the population aged. This factor alone would drive a decrease in workforce participation.
Without getting into too much detail, a couple of other trends could also be contributing to the decrease in workforce participation. The number of Americans on disability is at a record high and accounts for almost 5% of the working age population, while the number of Americans incarcerated is also at a record high, standing at about 2% of the population.
Taken as a whole, these factors point to the headlines about employment being deceiving as things may not be as bad as they sound. The decline in the workforce seems to be what we'd expect as the number of retirees increases and other government programs account for larger shares of the population.
If we can ignore the headlines and look solely at the implications of the trends and recent market action, it looks like we might be at the beginning of a new bull market. The chart below shows that we have seen about 14 years of a sideways trading range, similar to the times prices consolidated prior to the multi-year bull markets that began in 1949 and 1982.
Prices could fall from current levels, as the bears argue they should, but they could also break out to new highs. I believe the evidence is beginning to point toward the start of a new secular bull market that could last for at least a decade. This would mean it is time to start buying dips and accumulating long-term positions.
As a trader, my outlook changes with the evidence, but for now I am in the bull camp and expect stocks to be higher at the end of the year.
Recommended Trade Setup:
-- Maintain long position in SPY
-- Maintain stop-loss at $149
-- Maintain price target at $167 by the end of 2013
It won't be straight up to my price target for SPY, and there will be declines, but the trend remains up.
Gold Selling Could Accelerate Despite Worsening Global News
SPDR Gold Trust (GLD) lost 1.06% last week despite a strong 1.68% rally on Friday. GLD faces significant resistance and additional upside seems limited.
The chart below shows the assets in GLD along with its price. Investors added about $17 billion to the fund in the three months before gold peaked in September 2011. Many of those buyers now have a loss on this position. Sellers have removed about $17 billion in the past seven months, but it is unlikely that everyone who shows a loss in GLD has gotten out of their position.
Those showing a loss might be wondering what it will take to push gold higher. The current news from around the world presents a strong bullish case for gold with Japan's promise to double its money supply, government confiscation of wealth in Cyprus, and threats of war from North Korea -- proving that everything gold bugs have dreamed of can come true. Friday's up move in gold was likely due to the Bank of Japan's promise. We need to see follow through to the upside from that move before turning bullish, even for the short term.
In the longer term, gold faces significant resistance. Buyers who rushed into the gold bubble two years ago may be discouraged that gold has not gone up on bad news and they may feel that stocks offer better returns. Their selling would fuel more declines in the metal. They also might continue holding until they are even, and selling then would show up as resistance on the chart.
PowerShares DB Gold Short ETN (DGZ), an inverse fund that goes up when gold prices fall, gained 0.56% last week and remains a buy.
Recommended Trade Setup:
-- Buy DGZ on dips below $12.25
-- Maintain stop-loss at $11.75
-- Maintain price target at $14
This Week's News
Earnings season starts on Monday, but the Fed minutes on Wednesday could be the most important event to watch this week.