Post NFP action and the futility of predictions.

Well today’s price action in the Indices looks less like a ‘Santa’s Rally’ and more like ‘Santa’s Sledging Session’ as prices slide lower with increasing speed. Also added to by the biggest crash in the Greek Stock Market since the crash of 1987 (down 13% today as I write this).

Anyway I want to turn the clock back a day or two, back to Fridays NFP numbers. NFP day is always a fascinating day. I said in my previous post ( Quick Post NFP Trades….) that I rarely bother to watch or trade NFP day anymore. It tends to descend into pure media-driven hysteria as the financial media and twitter-sphere create an exercise in pure hyper-bole. Last Friday was a good example. For those of you who wish to join in the hysteria you can even place your prediction of the jobs report under the twitter hash of #NFPGuess. Here’s what the major players were suggesting the number was going to be on friday:

JPMorgan – 200k
Goldman Sachs – 220k
Citigroup – 225k
HSBC – 230k
UBS – 230k
Credit Suisse – 235k
Morgan Stanley – 235k
Deutsche Bank – 250k

From these and other ‘professional estimates’ Bloomberg suggested a number of 237k ‘based upon consensus’.

What was the number? Well it was a whopping 321k, which as you’ll note is somewhere between 71 – 121k different from the professionals best guess! Now by my (meagre) understanding there is a 100,000 margin of error in the numbers. Also, admittedly these numbers can be revised in the future – (there you go I’m leaving the banks with a get out of jail card there – which is a first for me.)

Nevertheless do you not think that it’s a bit amazing that all those Financial Institutions with all their resources (imagine floors and floors of space taken up by either brash young PhD equipped analysts or rack space full of computer algorithms) can not get the number right, or even remotely close?

As always it’s both a threat and an opportunity. It’s a threat that these so-called professionals have no idea what they’re doing (management by committee rarely works well). They, like yourself are just making their best guess based on the info they have to hand. When the numbers are so far out of whack from what the smarty-pants analysts are calling is it no wonder that we see such volatility post the release as you can just imagine trading desks and research teams are trying to cover themselves (figuratively and literally) with clients as they amend their positions.

And that’s what also offers an opportunity for savvy private traders who are nimble and educated enough to be able to take advantage of the volatility and movement. Theres an old trader saying about how you shouldnt care what the news is – just how the market reacts to it. That there is the way to approach these events. The market’s reaction is key.

In the first week of each month I get a few requests to do media appearances and I usually turn them down. Why? Because I know they’re going to want me to give them a best guess on the NFP number and for me to reply with, “Well personally I think that trying to second-guess the NFP number is merely a bloated piece of intellectual candy-floss which offers no real insight into markets and is ultimately a pointless exercise in futility….” is unlikely to win me many friends or repeat appearances! Well I don’t think that would go down with the TV channels would it? They’re mostly all about the intellectual candy-floss of mindless drivel. Like fair-ground candy-floss you can be dazzled by the bright lights and chomp on it all you want but in the end its a pretty shallow, empty and meaningless experience.

So what are the take-aways? Well if you engage in guesses over NFP numbers (or any other fundamental data) and you’re wrong, well don’t be too hard on yourself – even the professionals are pretty rubbish at it. Secondly spend less time second-guessing the numbers and more time watching how the market reacts to the news. That will tell you oh so much more.

Until next time, trade well!

Paul