What to Watch

The ADP Employment Report will be released today. It’s a good way to get a jump on the Bureau of Labor Statistics’s Employment Situation Report to be delivered Friday. That’s the famous headline number, and is one of the most important economic reports that investors watch. Today’s report can give you an edge in trying to know what’s in store for Friday.

The ADP report is taken from the payroll firm’s 400,000 U.S. business clients employing some 24 million people in every industrial sector. It’s in the cat bird’s seat to know what the employment scene is, and that’s why it precedes the official report each month.

Consensus expects ADP to show a loss of 643,000 jobs in April, after showing 742,000 lost in March. Meeting or beating the consensus today and Friday will add another arrow to the bullish quiver saying the recession is bottoming out or, among the most cheerful, already over. A report of more jobs lost than expected will add to the sense that this sudden recovery has come far too fast, and that an economy that can’t keep people working is no economy to write home about — or invest in.

On the market itself, watch the overbought indicators. Already the S&P; 500 is sitting at an RSI of 66. Remember, 70 is where official overbought begins and 30 is where official oversold begins, but nothing is precise in this business so most professionals take note when the indicator gets over 60 or below 40.

The typical RSI range of the market changes between bull and bear markets, according to work done by Constance Brown. A bull market will see an RSI range of 40-80 while a bear will see one of 20-60, for example. If you think unemployment will get to at least 10% before this is over and realize that we’re parked at “only” 8.5% now, then you probably think this is a bear market rally. If so, you should find the current RSI of 66 to be a red alert for downside ahead.

Also, the percentage of stocks trading at least one standard deviation above their 40-day moving average is at an all-time high of 83%. You can see a nice chart of that at Quantifiable Edges.

Precision is important in this business. Many forecasters called for a rollover to begin two weeks ago, and advised hedging with vehicles like BGZ and FAZ. In the past two weeks, those hedging vehicles have lost 20% and 29% respectively.

Keep in mind what I’ve written before. The first step of downside protection is setting trailing stop loss orders. The second is opening a hedge. The last two weeks have shown why.

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