Every Thursday before the markets open I enjoy reviewing the Weekly Initial Unemployment Insurance Claims. As most readers of FullyInformed.com know I consider the Weekly Initial Unemployment Insurance Claims to be one of the best Market Timing System methods. It has a proven track record going back more than 2 decades. This Market Timing System often spots pressure building on spots and those who follow this market timing system often get a “heads up” before other investors. Interested investor can read the entire article on this market timing system method through this link.
Feb 20 2014 Weekly Initial Unemployment Insurance Claims
Today’s Weekly Initial Unemployment Insurance Claims are important as they give a clue as to the possible direction of the unemployment and market direction trend. Investors have become a bit concerned over the last several days that perhaps not all the poor economic numbers coming in were due to the weather. I know myself, I found it hard to believe that the soft patch we seemed to be entering could all be weather related. The Weekly Initial Unemployment Insurance Claims however came in at a better than expected 336,000 for a drop of 3000 claims.
At first glance the numbers seemed in-line with most expectations although the average economist was looking for 335,000. But the underlying trend is showing that the average of new claims over the past month which many consider a more reliable indicator, actually rose by 1750 to 338,500. While this is the highest amount in 6 weeks it is sitting just above the past 6 month average. The concern I see is that the economy does not seem to be increasing employment but instead sitting at a holding pattern. 2013 for the most part saw a steady decline, but that decline seems to have leveled off. The economy needs to add 250,000 jobs in a month to be back booming and that is just not happening and hasn’t actually happened in a very long time.
Economists say it is still too early to tell if the numbers coming in are being influenced by the poor weather but they are now pointing out that the last two monthly employment reports are showing incredibly weak growth. All of this is happening at the same time as the Federal Reserve is tapering liquidity. It is questionable if the Fed has picked the “top” of the employment numbers to be begin reducing. It is also very questionable whether the recovery will remain strong enough into 2014 to get true unemployment lower. That means increasing the participation rate which stands at its worse level in over 30 years.
Trading Chart Based On Weekly Claims
Just to repeat what I wrote about last week, I base the extent to which I apply my available capital to trades on a pattern developed around the Weekly Initial Unemployment Insurance Claims. Here is that information again.
Weekly Numbers Above 350,000 and Climbing
I focus more on selling in the money covered calls and doing Spy Put Options aggressively. As the weekly claims rise and get closer to 400,000 I normally buy puts on stocks that based on chart patterns I believe are overvalued and will pull back if the market direction corrects. I tend to place fewer trades and begin to raise cash. Above 400,000 I raise a lot more cash.
Weekly Numbers Between 325,000 to 350,000
When the weekly numbers move below 350,000 but stay above 325,000, such as the period now, I focus on trading dips in stocks through selling puts usually naked, doing some put credit spreads and doing some covered calls. This is because in this range normally the market can still move higher but it is more difficult for it to be a straight line up. This means I can sell some covered calls when the market is pushing higher because the likelihood of it not pushing too high is much greater. This will leave my covered calls normally out of the money and expired. I also pick up some stocks for short-trades often referred to as swing trades or even day trades although I do not do many day trades. I only pick up stocks in dips whether they are in a dip themselves such as Cisco this morning, or the market in general is dipping such as it did last week, which pressures almost all stocks. This is a good place for put credit spreads as well since it offers more protection than selling puts naked. This is also not too bad an area for call credit spreads as stocks may have a more difficult time rising too quickly or high enough to place call credit spreads at risk. I tend though not to do a lot of call credit spreads. I prefer being on the Put Selling side.
Weekly Numbers Between 300,000 to 325,000
When the numbers fall below 325,000 stocks have a much easier time moving higher. This means being careful with covered calls unless I do not want to own the stock and would like to be exercised out. It also means being careful on call credit spreads which I do rarely anyway. I sell puts far more aggressively here and will definitely consider put credit spreads as well.
Weekly Numbers Below 300,000
Below 300,000 the market direction rarely corrects. This means I concentrate heavily on Put Selling, doing stock trades particularly using the Bollinger Bands Strategy Trade.
I do very few covered calls, although in my retirement account I do a lot of covered calls on stocks I want exercised. This is because in Canada investors are not allowed to sell puts, even cash secured puts, in our retirement accounts. Therefore I look to set up covered calls trades wherever practical to earn profits that can compare to Put Selling trades. This is not always as easy as it might appear. Put Selling is far superior to covered calls in my opinion. You can read this article to understand why.
At the level below 300,000 I increase the quantities of naked puts I sell and as the numbers fall to 250,000 or more I bring more cash into play. I do no call credit spreads but the number of naked puts is easily 4 or more times higher. When the Weekly Initial Unemployment Insurance Claims get to this level the economy is usually booming and stocks are doing well.
Market Timing System Summary
The outlook based on the Weekly Initial Unemployment Insurance Claims is unchanged. We are sitting just below 350,000 and above 325,000. By following this trading system for my capital use I have rarely been caught with a lot of capital in the market in any major downturn. There are many articles circulating about an impending crash in stock values in 2014. This is an attempt to draw an audience and I believe needs to be ignored.
George Soros Bets Big
That said, famed billionaire George Soros apparently is holding 11.3% of his holdings in Spy Put Options for what he must believe is a coming large pullback in the S&P 500. He did take this out at the end of December so who knows what the position is at the present time but perhaps it was just a large hedge in case of a serious pullback. If he took out the position at the end of December then he should have made some return in the last correction over the last couple of weeks. That’s the problem with this type of news, it is old.
My Own Outlook – I’m Still Trading
I have always found that by following the Weekly Initial Unemployment Insurance Claims and the moving averages I am well protected from any major collapse of valuations. When the Weekly Initial Unemployment Insurance Claims starts to move closer to 350,000 that’s when I begin to buy Spy Put Options 3 months out for a hedge against what could be a larger correction than what we have just gone through. At present the numbers in my opinion do not justify holding capital in the Spy Put Options for more than a day trade here and there. As a long-term hedge I believe the Weekly Initial Unemployment Insurance Claims are still strong enough to support committing my capital in carefully placed trades which is exactly what I am doing.
Internal Market Direction Links
Profiting From Understanding Market Direction (Articles Index)
Understanding Short-Term Signals
Market Direction Portfolio Ongoing Trades (Members only)