Despite what appeared to be a pretty decent jobs report, stocks basically fell apart on Friday. So with Ms. Market once again confusing the masses, I thought it might be a good idea to try and make some sense of the action.
In reality, there are three topics to discuss here: (1) the jobs report, (2) the big dive in tech, and (3) the possibility of what is called "multiple contraction." But since each are multi-faceted, it is probably best to take them one at a time. So, let's start with the jobs report.
Is Good News Bad For Stocks Again?
Although the reasons espoused by the popular financial media for Friday's dance to the downside were really over the map, one of the primary focal points was - at least in the early going - the January jobs report.
The Labor Department announced Friday morning that the economy created a total of 151,000 new jobs in January, which was below the consensus expectations and a represented a pullback from December's exceptionally strong pace. And in doing some math, we find that the economy created 2.74 million jobs in calendar year 2015, which was the sixth straight year of gains.
Next up, we learned that the unemployment rate fell to 4.9%, which was (a) a downside surprise and (b) the first time the rate has been under 5% since February 2008. And when one looks at the "household survey," the report looked even better as the unemployment rate declined smartly on a monthly basis and the labor force participation rate improved.
Finally, the report indicated that workers were working longer hours and making more money. The average workweek lengthened to 34.6 hours from 34.5 (note that the one tenth uptick is the equivalent of 350,000 new jobs) and average hourly earnings rose a larger-than expected 0.5%. And on an annual basis, payrolls rose 4.8% year-over-year.
So all in, this would appear to pretty good report, right? But unfortunately, that's the problem.
Painted Into A Corner?
For many years now, the FOMC has targeted the labor market as its "trigger" for when to begin "normalizing" monetary policy (which, in English, means moving the Fed Funds Rate from 0% back towards the mean, which has historically been somewhere in the 3% range). So, with the jobs market continuing to look pretty good here in the U.S., Janet Yellen's gang would appear to need to stick to the plan of hiking rates in 2016.
Here's the rub. Forget the idea of "market turmoil" and Yellen's merry band of central bankers riding to the rescue (although we should expect to hear a lot more dovish Fedspeak if stocks continue to move lower). No, in reality, this is about the fact that monetary policy in the U.S. is diverging from the rest of the world.
In short, the problem is that rates in the U.S. are expected to move up while everybody else's are moving down.
Why Do We Care?
Here we go... Higher rates in the U.S. means a stronger dollar.
A stronger dollar means lower prices for oil as well commodities of all colors, shapes, and sizes.
And while lower oil prices theoretically help the U.S. consumer (so far though, reports indicate that the consumer hasn't been spending their savings from the gas pump), falling prices hurt the global economic situation.
In turn, a weakening global economy hurts the earnings of multinational corporations.
And everybody can probably agree that falling earnings isn't exactly a desired result for stock market investors.
So there you have it. What appeared to be pretty good economic news wound up being bad for stocks.
What We're Watching
To be sure, the Fed being painted into a corner wasn't the only story on Friday as the high profile tech stocks (aka the "FANGs" - Facebook, Amazon.com, Netflix, and Google) got smoked (with LinkedIn being the biggest loser), the term "multiple compression" was bandied about with regularity, and there was a lot of talk of "forced selling" and "fund implosions." But since some of these issues could easily be fleeting, we'll wait to see if any become a focal point of the market before going into greater detail.
In the near term, prices have reached an important juncture. Cutting to the chase, the bulls need a stop, right here, right now.
S&P 500 - Weekly
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The Bottom Line
It would appear that we are currently seeing what technicians call a "retest" of the January lows. And while technical analysis can often be more art than science, how the market acts in the coming couple of sessions will be important.
While traders disagree on the exact price levels that are critical on the S&P 500 and high speed trading often makes levels irrelevant intraday, a close below 1860 on the SPX is likely to bring in an awful lot of "technical selling" (i.e. algos chasing their tails to the downside). In other words, if this level were to be meaningfully violated on a closing basis for more than a day or two, then we may have to accept the fact that bears are back.
However, if the current "retest" is successful - meaning that the bulls can hold the 1860 level - then another spirited rebound (think 400-500 points on the DJIA) is the most likely next step in Ms. Market's game.
And lest we forget, global central bankers are not fond of "market turmoil." As such, if things start to get ugly we should expect to hear more from the ECB, the BOJ, and members of the FOMC. So, stick around, the next few days are probably going to be interesting.
Publishing Note: I am traveling the vast majority of the next two weeks (the good news is most of the trip is to the west coast!). Thus, reports will be published as time permits.
Turning to This Morning
Congrats to our beloved Broncos and a defensive performance that rivaled the '85 Bears! Almost nobody expected that outcome - I guess that is indeed why they play the games! Turning to the markets, things are looking ugly again in the early going. Oil is down hard and back below $30, which seems to be the primary concern at this point. However, divergent Fed policy and all the currency ramifications also remain in focus. Chinese markets are closed for the Lunar New Year and European markets are down 2% to 3% across the board. As such, U.S. futures are pointing to a weak open on Wall Street.
Today's Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: Closed
Crude Oil Futures: -$1.04 to $29.85
Gold: +$23.60 at $1181.30
Dollar: higher against the yen, euro and pound
10-Year Bond Yield: Currently trading at 1.806%
Stock Indices in U.S. (relative to fair value):
S&P 500: -22.75
Dow Jones Industrial Average: -201
NASDAQ Composite: -78.75
Thought For The Day:
The way we choose to see the world creates the world we see. -Barry Neil Kaufman
Here's wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research
Investment Pros: Looking to modernize your asset allocations, add risk management to client portfolios, or outsource portfolio design? Contact Eric@SowellManagement.com
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Oil Crisis
2. The State of Global Central Bank Policy
3. The State of the Stock Market Valuations
4. The State of China's Renminbi
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Negative
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Moderately Negative
(Chart below is S&P 500 daily over past 2 years)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Key Near-Term Support Zone(s) for S&P 500: 1870
- Key Near-Term Resistance Zone(s): 1950
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator (Short-Term): Negative
- Price Thrust Indicator: Negative
- Volume Thrust Indicator(NASDAQ): Neutral
- Breadth Thrust Indicator (NASDAQ): Neutral
- Short-Term Volume Relationship: Neutral
- Technical Health of 100+ Industry Groups: Negative
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- S&P 500 Overbought/Oversold Conditions:
- Short-Term: Moderately Overbought
- Intermediate-Term: Oversold
- Market Sentiment: Our primary sentiment model is Neutral
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.
- Weekly Market Environment Model Reading: Negative
Trend and Breadth Confirmation Indicator (Short-Term) Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.
Price Thrust Indicator Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.
Volume Thrust Indicator Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.
Breadth Thrust Indicator Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.
Bull/Bear Volume Relationship Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.
Technical Health of 100 Industry Groups Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.
Weekly State of the Market Model Reading Explained:Different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Market Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.
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Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.
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