Why 10% jobless rate means misery for many, buying opportunity for some

As news broke that the U.S. jobless rate crossed the dreaded 10 percent mark, many investors braced for the market's reaction. The response to word that unemployment reached levels not seen since 1983? The Dow Jones industrial average closed up 17.46 points to 10,023.42 and the S&P 500 ended the day at 1,069.30, up 2.67 points. Not exactly a sell-off.

So did news on Friday of 10.2 percent unemployment represent a buying opportunity? For those who follow market trends, it did.

Although the labor department said the country in October lost 190,000 jobs -- or 15,000 more than expected -- active traders in the market keyed in on another unemployment statistic: the monthly revisions of unemployment results. That's when government statisticians, armed with more complete data, go back and and revise up or down previous months' unemployment figures.

Randy Frederick, director of trading and derivatives at Charles Schwab (SCHW), says it's true that 15,000 more jobs than expected were lost last month. Not good. But, he says, the government also revealed Friday that there were 47,000 fewer jobs lost in August than previously expected. And in September, the government had overstated the job losses by 44,000. "So if you net the three together on a three-month basis, then you're 76,000 better than expected," said Frederick. "The markets probably didn't have that built in."

Frederick said that although the news was bad, traders react to trends, and the trend has been that the unemployment numbers have gotten progressively "less bad" each month. The improved unemployment revisions indicate that unemployment is flattening out faster than people thought, which is good for the market.

"The market may not have reacted as sharply in either August or September because those numbers were weak, but now that we know those numbers were reported weaker than they really were -- to me it's a comfort for the market going forward," he said.

But Frederick cautioned the reaction to 10 percent unemployment was not over, and investors should be prepared for what happens on Monday.

"The people who actually have regular jobs and aren't actively engaged in watching the market every minute are going to wake up Saturday and see on the front of every major newspaper in the country -- 10.2 percent unemployment highest since 1983 -- and I think that could spawn a rout of profit-taking come Monday morning," Frederick said.

The psychological affect of reaching 10 percent unemployment may send some investors fleeing. But Frederick says that dip could provide a buying opportunity. "It's nothing to be cautious about like an end of the rally, but there is some potential weakness there."

The weakness he talks about is temporary because Frederick believes the current bull market run still has legs due to another trend. In the last four months, the markets have begun rallying before losing steam after the options expiration date through to the end of the month. That pattern was kept intact, as the market was up modestly this week. The month's options expiration date is on Nov. 20.

If the trend continues, it could be a buying opportunity.


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