How I’m Trading a Market That’s Sending Mixed Signals

How I’m Trading a Market That’s Sending Mixed Signals

Posted On May 7, 2021 2:37 pm

This morning’s disappointing jobs report creates more confusion as to the underlying strength of the economic recovery.  Many believed that this would cause a correction, but the S&P 500 made an all-time high today.

It’s a bit of a conundrum that’s playing out in the stock market. And investors are questioning whether they should be looking to continue buying growth stocks or questioning if it’s time to concentrate on value stocks.

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For my Options360 Concierge Trading Service,  it means being patient, identifying good risk/reward setups, and then keeping positions on a short leash.  

Data showed that only 226,000 jobs were added in April — far below the one million expected.  The big miss comes with several conflicting trends, mostly seeming to confirm my belief that the Fed’s monetary policy and massive stimulus package are distorting the disconnect of Wall Street from Main Street.  The jobs report showed surging demand in job openings with what appears to be a shrinking pool of applicants. The mismatch is mostly occurring in the lower-level service and manufacturing sector where over 10 million job openings remain unfilled despite a nearly 30% wage increase.  The main culprit seems to be the combination of stimulus checks and increased unemployment benefits, which have led people on the lower end of the wage scale to receive just as much not working as they would if they’d have to trudge to a job every day.  

This has several ramifications, as many of the hardest-hit businesses in the leisure and hospitality sectors face trouble fully re-opening, even with pent-up consumer demand bursting at the seams. It will also perpetuate what has become known as the “K” shaped recovery, where corporate white-collar (‘knowledge’ workers) did just fine through the lockdowns while the aforementioned service sector workers and small business owners suffered immense financial pain. 

In terms of stock market trading, if companies continue increasing wages to lure workers, profit margins will be heavily impacted, suggesting inflation is anything but “transitory,” as the Fed claims. Unlike commodity or other input, costs wage pressure can rarely be passed on to the customer.   I can think the Fed and Congress are both misguided when they pump liquidity and helicopter money into what’s clearly a strong recovery from unprecedented circumstances. But regardless, I “don’t fight the Fed.”

So, in terms of trading, I retain a bullish bias — patience and stock selection will become increasingly important.  There will be some companies such as Kellog (K) and Procter & Gamble (PG) that can benefit from ‘transitory’ inflation via raising prices.  Both reported strong earnings, highlighting margin expansion.  Home Builders might continue benefiting from demand, but the stress of material costs such as lumber, steel, and cement, is barely keeping pace with sales price increases.  Throw in energy and even the commoditized end of the semiconductor sector and commodity price benefits may indeed prove transitory for the cyclical sectors. 

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On the tech/growth front, we’ve had a nice correction in many names from high- fliers such as Zoom (ZM) and Teledoc (TDOC).  However, the valuations remain stretched. But I’ll suggest they have a secular tailwind, which presents a bullish case over the long term as they can grow into their valuations. 

As far as some specific trades go, earlier this week I mentioned entering Netflix (NFLX) if it held the $500 level.  It initially didn’t, so no trade was made.  But, it did reclaim that level today, which will trigger a Monday entry. 

netflix nflx october 2020 to may 2021 chart

For myself, it’ll certainly be another weekend of pouring through charts. Hope that you enjoy yours!

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.