How To Trade An Improving Labor Market Momentum

by: BubbleBustInvesting

After a slow-down last summer, the U.S. labor market is gaining momentum-private payroll jobs increased by 171,000 in October, up from 114,000 in September, and above the 125,000 economists expected; and the12-month average of 157,000 per month. Unemployment rate edged a little-bit higher to 7.9% from 7.8%, due to an increase in labor force participation-a positive development, as it raises the potential GDP of the economy; health, retail, and leisure, and construction industries were among the top employment gainers.

While many have been skeptical over these numbers, as employment reports are the subject of intense political debates in view of upcoming elections, they are certainly pointing to an improving economy. What does this report mean for traders and investors?

First, an improving economy will take the pressure on the FED to launch another round of QE3. This is certainly bad news for precious metals. Gold was already trading close to $20, dipping below the $1700 mark per once; SPDR Shares Gold (NYSEARCA:GLD) are down close to $2 or 1.10 percent, and Ishares Silver Trust (NYSEARCA:SLV) was down 42 cents or 1.35 percent.

Second, a stronger economy is bad news for Treasuries, especially at a time when they trade at record low yields. So, I will Stay away from U.S. Treasuries -- and Treasury ETFs like AGG,BND, LAG, and TLT.

Third, investors may want to buy into economically sensitive sectors like homebuilders, as higher employment increases the likelihood of people buying homes. Besides, economic fundamentals for the industry have been improving: New home inventories are declining; homebuilder confidence is improving; home prices are stabilizing; and industry leaders like Toll Brothers (NYSE:TOL) have been reporting better-than-expected earnings results. Conservative investors may want to buy an ETF investing in homebuilder stocks like SPDR Homebuilders (NYSEARCA:XHB) and Ishares Dow Jones Home Builders (BATS:ITB), or buy the shares of diverse homebuilders like D.R.Horton (NYSE:DHI).

Forth, investors may want to stay with bellwether companies like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) with dominant market positions that are well positioned to benefit from a rebound in consumer spending; and still trading at a reasonable PE-Apple is trading at a forward (Sept 2013) PE of 12.52, while Google is trading at a forward PE of 15.30 (Dec 31, 2013).




Forward PE



Operating Margin

35.62 %


Qtrly Revenue Growth (yoy)



Qtrly Earnings Growth (yoy)



*Fye Sep 24, 2013

+Fye Dec 31, 2013


A few words of caution: Employment data are subject to revisions; and it is unclear how the November and the December reports will be affected by Hurricane Sandy and the impeding fiscal cliff.

Disclosure: I am long DHI, ITB, TOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Long and short on AAPL with options.Short on SLV