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How to Trade the Jobs Market

Everyone waited with baited breath for Friday's employment numbers, notably one of the most important economic reports that pop out of the data pools each month. Some would call Friday's headline alarming. After all, the economy lost 95,000 jobs in September, much wider than the expected loss of merely 8,000. And with those ugly numbers most would naturally expect the stock market to, well, fall off a cliff. That is, unless you realized the stock market does not care anything about the nation's employment numbers.

What gives? The media would have you believe the market did not fall because the majority of these jobs were government jobs that do not have a significant impact on the overall economy. So, if you readily believe all the financial news gospel, then you have your answer. For those that like to dig a little deeper into the issue, allow me to let you in on a little secret: As long as the U.S. dollar is weak, fund managers will be forced to allocate their capital in equities.

All the stock market cares about right now is whether the U.S. dollar is going higher or lower. There are a couple of different reasons for this. Part of it has to do with a lower dollar making U.S. investments cheaper, and thus more attractive, to nations with other currencies. Also, as the dollar falls, large companies like Procter & Gamble (PG), Diamond Offshore Drilling (DO), Caterpillar (CAT), General Electric (GE), Microsoft (MSFT) and so on, do better as their overseas sales improve due to the cheaper dollar. As long as the currency devaluation wars continue (the nation with the weakest currencies wins as they will have the most exports), tangible assets such as precious metals and companies (via their stock price) will move higher.

So how do I plan on taking advantage of the dollar's continued weakness? There are two ETFs options traders can play, PowerShares DB US Dollar Index Bullish (UUP) and CurrencyShares Euro Trust (FXE). Keep in mind the inverse relation these ETFs have with each other. With dollar weakness, look for UUP to continue moving lower as a short play, and look for FXE to continue moving higher as a long play. In fact, its wise to watch these during the day. A move higher in FXE (and a corresponding move lower in UUP) is the only real signal the stock market is following.

By understanding this, a trader can save a lot of time. There is no need to pour over all of the economic reports that come out every week. Just watch these two ETFs and they will tell you what the stock market is going to do.

At the time of publication, John Carter held no positions in the stocks or issues mentioned.

John is a Commodity Trading Advisor with Razor Trading. McGraw Hill commissioned him to write a book entitled Mastering the Trade, which was released in January 2006. Carter has also been featured on ABC Money. He and Hubert Senters founded and run the Trade the Markets web site.

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