06/11: Markets are resilient in the face of a difficult U.S. jobs report: 190,000 jobs shed

With apologies to the reader for the delay in the production and publication of this post -- finally getting around to Friday afternoon's business on Sunday evening is distinctly reminiscent of long-gone high school days -- I am pleased to report that Friday's trade revealed the U.S. equity markets as resistant to downward pressures from further ill news from the anemic employment front.

The benchmark S&P500 index closed up a quarter percent at 1069, after descending as low as 1059 in opening trade (when investors provided initial reaction to the weak U.S. Department of Labor report) and tip-toeing as high as 1071. The jobs report, released sixty minutes prior to the market open, indicated that 190,000 jobs were lost in October and that the national unemployment rate had increased to 10.2 percent, crossing the psychologically important ten percent level. The number was slightly below economists' average estimate of negative 175,000, and the reading validates the improving trend of job losses over approximately the last ten months, with the hemorrhage abating from a nadir of about 800,000 monthly job losses. A ten-day chart, courtesy of bigcharts.com, follows:



I'd like to briefly call attention to the diagram below the customary price-vs-time chart in the above schematic. That collection of a histogram and two correlated lines (one blue, one red) is known as a Moving Average Convergence / Divergence indicator (known universally by its acronym: MACD), a tool used by technical analysts to test for attractive buying or selling opportunities. In brief, MACD generates 'buy' recommendations when a security's recent price movement (usually defined for this indicator as a 12-period exponential moving average, or EMA) is more bullish than the combination of both its recent price movement and its more dated price movement (usually defined for the MACD as a 26-period EMA). The underlying assumption in the above argument is that recent price strength correlates with future price strength. To explain the diagram then: the blue line is 12-period EMA minus 26-period EMA (subtracting one EMA from another 'normalizes' the plot, i.e. transforms the data into an oscillator with a mean of zero); the red line is a smoothing of the blue line, namely a (usually) 9-period EMA of the blue line; and the histogram is the difference between the blue line (the MACD) and the red line (the MACD Signal Line). A 'buy' signal occurs when the blue line crosses the red line from below, or in simpler terms, when the histogram goes from negative to positive. The signal is strongest when the 'buy' signal occurs while both red and blue lines are deep in negative territory. A 'sell' signal is the opposite, i.e. when the histogram goes from positive to negative. A Wikipedia article provides a more complete explanation of the MACD indicator.

To apply the MACD to the above 10-day chart of the S&P500, then, notice a 'buy' signal occurring late on Monday, 11/2, just prior to the beginning of a rally that lasted the remainder of the week. Yet there were other false warnings, for instance the 'buy' on the morning of Monday, 11/2 and the 'sell' on Friday, 10/30. It must be said that the MACD is not a silver bullet, although it certainly is useful when used in context with other technical analysis techniques.

My trade of Friday wrapped up with the opening of a long position (consisting of December $4 calls) in Citigroup (C), our government-owned bank. :) C is showing, on a 10-day and 3-month chart alike, a bullish consolidation pattern with a possible nascent breakout. I'm hoping for a pop to above $4.20+ in Monday's session; shares ended Friday at $4.06. Here is a pair of charts:



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As a final note, forthcoming soon will be posts regarding two fantastic Chicago Symphony Orchestra performances I recently attended!