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Trading vs. Investing

Updated: Jul 20, 2023

Apparently, it’s very difficult these days to figure out who really has a job and who doesn’t. Or, for that matter, who’s making money and who’s not.

Friday’s U.S. jobs report is still rippling through economic circles, politics and financial markets. The addition of 2.5 million workers to payrolls and a decline in the unemployment rate -- albeit to a still-nosebleed-high 13.3% -- defied expectations for another sharp deterioration in both measures. So how does one reconcile the figures with jobless-claims numbers that show about 9 million more people claiming unemployment insurance benefits?

As the Bureau of Labor Statistics (BLS) detailed of its own accord, their survey-takers misclassified around 5 million people as employed but absent from work instead of unemployed on temporary layoff. If you counted those people as unemployed, the jobless rate would have been about 3 percentage points higher on an unadjusted basis, or about 16%.

Of course, these numbers are always a mess, this month and every month. According to the St. Louis Fed, the distribution of revisions to the original BLS numbers is normal during expansions, but the initial numbers, on average, underestimate the change in employment by 18,100 jobs. On the flipside, during a recession, their initial employment numbers have a mean of -20.8, meaning they’re likely to be overestimated by approximately 20,800 jobs.

There was a time in my life, maybe back when Amazon only sold books or when General Electric was the world’s biggest company, when it would have seemed crazy to me that traders would use numbers like that-- during a pandemic and riots in the streets-- to buy stocks or much of anything besides toilet paper. But traders established fresh bullish positions last week by buying 35.6 million new call options on equities, according to Sundial Capital Research founder Jason Goepfert. ...And that was up from the peak of 28.7 million in February, when speculative activity ran rampant.

“Options traders made stunning bets on rising prices,” Goepfert wrote. “This kind of activity has a strong tendency to lead to negative returns in the S&P 500 and other indexes over a multi-week to multi-month time frame.”

At the heart of the speculative activity are smaller investors. According to Sundial, small trader call buying made up more than 50% of total volume last week, the highest since 2000. Past instances when bullish small trader positions made up 45% or more of volume preceded a median loss for U.S. stocks of about 3% in two months’ time and 15% in a year, according to Goepfert’s note.

“Small traders are pushing their luck in a major way,” said Goepfert. “It seems increasingly risky to try to chase this rally along with traders who have traditionally been extremely reliable contrary indicators.”

Talk about contrary indicators. A couple of weeks ago, Warren Buffett let it be known that he had completely exited his airlines holdings, which had been significant. On the other hand, those contrary indicator young day traders seem to be taking the other side of his trade. The US Global Jets exchange-traded fund, (JETS), posted its 64th consecutive day of inflows last Tuesday. The fund’s top holdings are the four major U.S. airlines. JETS held just $33 million in early March as the coronavirus pandemic grounded global air travel; it’s now over $1 billion.

According to Frank Holmes, chief executive officer of JETS issuer U.S. Global Investors, the boredom of being stuck at home and the strong rebound in carriers after the 2001 terrorist attacks and the 2008 financial crisis have attracted young traders. “All these millennials, being stuck at home with no bars to go to and no beaches to travel to, took their money and became day traders,” said Holmes.

I think the major take-away here is that stock valuations can do strange things over the short run-- and they certainly have-- but they become moderated by time and earnings. Jim Cramer was just on CNBC this morning, imploring investors, “Please be careful when you see a reference in Twitter which says ‘we’re taking up Hertz’ or ‘get on board the Chesapeake train,’” Cramer said. “Because you’re not going to be the one that makes the big money. You’re likely going to be the one that loses the big money.”

“It’s a little disheartening to see all the $1 to $3 stocks that people are gunning. It’s not mine to judge. If you want to try and make money and it’s legal, that’s fine. But it’s not investing.”

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