AFTERNOON CAPSULE: IF ADP DATA IS CORRECT, RECESSION IS OVER
To gain an edge, this is what you need to know now.
Is Recession Over?
We wrote in the Morning Capsule
Unexpected Good News On Jobs
ADP is the largest private payroll processor in the country. It uses its data to give a glimpse of the jobs picture.
ADP Employment Change came at -2.76 million vs. -9.0 million consensus. This unexpected good news says that 6.24 million fewer jobs were lost in May compared to expectations. The difference between expectations and the reported numbers is huge.
This data does not jive with other data including weekly new unemployment claims we report here and carries heavy weight in our models.
As of this writing, we are still digging into it to see which data set is wrong – the one reported by ADP or the one reported by the government.
There appears to be a flaw in ADP data in that ADP appears to count furloughed workers as employed. This is not yet confirmed.
It is important because millions of workers have been furloughed.
The Best Course Of Action
The best course of action at this time is to wait for the data from Department of Labor on Friday.
Short Squeeze
The second leg of short squeeze is in full swing. Short squeeze, in large part, is responsible for the rally.
Money Flows
The momo crowd money flows since the Morning Capsule are extremely positive.
Smart money flows since the Morning Capsule are neutral.
Short squeeze money flows are extremely positive.
A Special Note To New Subscribers
Note the smart money behavior. Smart money tends to sell into strength on strong up days.
New subscribers should consider adopting smart money’s way of investing and trading.
Sentiment
Sentiment is extremely positive.
Sentiment is a contrary indicator at extremes. In plain English, this means that when sentiment becomes extremely positive it is time to sell and when sentiment becomes extremely negative it is time to buy.
Gold
The momo crowd money flows in gold are very negative since the Morning Capsule.
Smart money flows are neutral in gold since the Morning Capsule.
Momo crowd money flows in gold miners are very negative.
Oil
The momo crowd money flows in oil are extremely positive since the Morning Capsule.
Smart money flows in oil are negative since the Morning Capsule.
Buy Zones And Buy Now Ratings
Any buying should be strategic and not tactical.
Those who meet the protection band criteria as outlined in the Morning Capsule and are significantly underinvested may consider continuing to lightly scale in based on buy zones and ‘Buy Now’ ratings of individual securities.
It is a mistake to buy all in at one time. Please see Trade Management Guidelines.
Nibbling
Consider not tactically nibbling at this time if you are not drastically underinvested and there is not significant room in your protection band criteria.
Close
There appear to be buy on close orders. This is the reason that the market is running up going into the close.
The content below is unchanged and is to be used for reference as needed.
Sophistication
Many investors are spoiled due to the decade long bull market. Many believe it is very simple – be all in or be all out. Unfortunately, the last decade was an exception to the rule.
As the market is running up, investors who do not understand the true nature of the market are jumping in with both feet without appreciating the risks.
Risk and reward are two sides to the coin. It is important to consider both.
For your reference, we are pasting the following from your Getting A Running Start Guide,
Everything should be made as simple as possible but not simpler.
Albert Einstein
Strategic Vs. Tactical
All investors should consider bringing more sophistication to their investing and trading. It is important to clearly understand the difference between strategic and tactical calls. For your convenience, a prior post is pasted below.
ASK ARORA: CASH AND HEDGES: UNDERSTANDING THE DIFFERENCE BETWEEN STRATEGIC AND TACTICAL CALLS
Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
We have written previously about the importance of understanding the difference between strategic calls and tactical calls.
We welcome your comments and questions. The law does not allow us to answer them individually. However, when a large number of subscribers ask similar questions, a post is done. Typically starting with Ask Arora.
Based on the questions received this morning, a refresher on understanding the difference between strategy and tactics is in order.
Strategy
Strategy defines medium to long term plan to achieve the highest risk adjusted returns.
Tactics
Tactics are small adjustments within the strategy to further enhance risk adjusted returns.
If You Could Pick Only One
We recognize that all investors have individual preferences. If you could pick only one, consider focusing on the strategy. Never focus only on tactics at the expense of strategy.
Strategic Call
The strategic call at this time is to stay cautiously bullish. The logic is very straightforward. Consider the following key points:
- The stock market has been going straight up for 10 years. It is late cycle. Portfolios have to be organized for the late cycle. Risks are much higher in the late cycle compared to when a bull market is in an early stage.
- The world is awash in debt. The sovereign debt owed by governments and corporate debt owed by zombie corporations has dramatically increased. It is a bubble that is getting bigger waiting for a pin to prick it.
- Valuations are expensive.
- A big reason for levitation of the stock market is money printing by the central banks. This can continue for a long time but not forever.
Tactical Calls
Tactical calls are simply short term adjustments. For example, a tactical call to decrease cash and hedges is based on the following:
- Weak hands temporarily washed out overbought condition.
- Overbought condition temporarily relieved.
- Sentiment backing off from almost extreme bullish levels.
- Overall better earnings.
Cash And Hedges
We provide a range for cash and hedges. Most investors would be in the middle of the ranges. As such, they would not need to make any change. When a change is given only at the edges of the ranges, only the most active investors need to make a change.
Arora’s 12th Law
Arora’s 12th Law is applicable here: To be successful at investing and trading, flow with the new data and stay nimble.
Bullet Proof Your Portfolio And Increase Your Returns
We consistently see that private investors, money managers and investment advisors who have attended the Bullet Proof Your Portfolio and Increase Your Returns seminar do significantly better compared to those who have not attended the seminar.
Here are the four main reasons why this consistently happens to investors who attend the seminar:
- They start understanding the true nature of the markets.
- Develop a better framework to handle the true nature of the market.
- Tend to act with more conviction and with more comfort.
- Tend to develop a better control over their emotions.
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