The November jobs report came out on Friday morning and it was better than expected sending the futures lower and creating a negative open for the stock market, but it didn't take long for the dip buyers to swoop in and turn the concerning news into another rally. The S&P 500 closed at a new 2023 high. Seasonality is on the bulls' side this month, but if there is a soft spot in December and it is in the next week to 10 days. Bond yields and the dollar were up sharply on the strong jobs data, sending the F-fund down on the day.
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The stock market has been jumping over the last six weeks on the prospects of tamer inflation, a more dovish Fed with not only the possibility of no more interest rate hikes, but the potential for a series of interest rate cuts next year.
The Target Rate probabilities for a rate cut at the Fed's March meeting went from 12% a month ago, to 55% a week ago, but after Friday's jobs report that ticked down to 43%. That's still a meaningful possibility but if the data continues to stay hot, the Fed could swing back to a more hawkish outlook.
If you didn't see, the November jobs report came in with 199,000 new jobs added, above the 175,00 that was expected, and the unemployment rate dropped to 3.7%, better than the 3.9% expected. Also, and maybe more concerning, is that wages moved up more than expected.
That all sounds positive for the economy, and it obviously is, but what the investors really want is for the Fed to stop raising interest rates and as we said, start cutting them next year. This jobs report gave them no catalyst to do either. That was why the stock market initially reacted very negatively to the report, but we still have the underinvested looking to buy any dips, and cash levels are very high giving the bull market outlook more ammunition.
The bond market seemed to get the picture regarding the strong jobs report as yields popped higher, and the 10-year Treasury Yield has held at the 200-day EMA so far. A modest relief rally in yields may not hurt the stock market, but a more meaningful move higher here most likely will.
The dollar also moved up on the economic data, but the stock market brushed that off as well. The UUP chart is actually quite a bit off its lows right now and that inverted head and shoulders pattern looks bullish for the dollar if it can break through that 104 - 104.5 area.
Higher yield and a stronger dollar could put an end to the rally but then again, in about a week and a half we move into the strongest seasonal stretches of the year for stocks.
So, that makes this week that much more important because there is a 2-day FOMC meeting this week culminating with a monetary policy statement on Wednesday afternoon. There is little chance that the Fed will act at this meeting but we will certainly get clues from them about what they are thinking.
Between now and then we will get another CPI report on Tuesday, and the PPI on Wednesday morning. It is likely that the Fed already has this information but what is more important to the stock market is what investors believe these numbers will do.
I continue to bring up this data because it is consequential to the strength of the dollar. The Fed balance sheet continues to get reduced, and unlike Quantitative Easing that we had for years helping to keep a breeze at the back of the stock market, quantitative tightening could be a headwind. The average 401K investor isn't watching this, but money managers sure on. It may be why many managers are lagging the market year (as am I) because the stock market has been plowing ahead despite this 2023 development
Here's a longer term view of the balance sheet and two things stick out to me. Quantitative Easing started in 2008 during the financial crisis and you can see that the balance sheet was growing from 2008 through the peak in 2022 when inflation became a concern and the bear market started. There was a blip in 2018 and it's no coincidence that the prior negative year for the S&P 500, before 2022, was 2018.
So that's a little macro analysis but right now the market is enjoying the seasonal benefits of December, although the next week and a half it is still a little vulnerable until about the 21st when Santa Claus usually takes over.
The S&P 500 (C-fund) has been hanging around that July peak for a while now. We now have two significant inverted head and shoulders patterns on this chart that barely filled in the right shoulder. I honestly don't know what to make of it. Is it a sign of strength? A sign of unfinished business that must be addressed? I didn't even mark the open gaps, which I have been obsessed with since we know gaps tend to get filled. They are large and will almost certainly get filled at some point, but at this point it could take months or years. But the point here is that a move down to 4400 would satisfy a lot of technical issues with this chart -- filling in a gap and forming the right shoulder. Will it happen before the end of the year, or very possibly afterward, when Santa has left the building.
DWCPF (S-fund) has been en fuego since the October low. It's flirting with the September peak now and there is an open gap near 1860. The momentum is clearly on the bulls' side and September has been good to small caps over the years. But you can see how stretched the chart is. Not that it can't go higher, but it is getting vulnerable to a pullback at some point. That 100-day EMA in orange has acted like a magnet this year so a pull back to that line (currently 1743) is possible at some point in the near futures (weeks to months.)
EFA (I-fund) is also extended as it climbs that long trading channel higher. A close below 73 could trigger more selling as it would push it below the blue channel. If the dollar does breakout (see UUP chart in top area) then it would give investors a good reason to take profits here.
BND (Bonds / F-fund) was down sharply on Friday but it remains in the ascending channel. Too far, too fast seems like a reasonable excuse for this to pause or pullback, and the CPI and Fed this week could be the catalyst.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
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The stock market has been jumping over the last six weeks on the prospects of tamer inflation, a more dovish Fed with not only the possibility of no more interest rate hikes, but the potential for a series of interest rate cuts next year.
The Target Rate probabilities for a rate cut at the Fed's March meeting went from 12% a month ago, to 55% a week ago, but after Friday's jobs report that ticked down to 43%. That's still a meaningful possibility but if the data continues to stay hot, the Fed could swing back to a more hawkish outlook.
If you didn't see, the November jobs report came in with 199,000 new jobs added, above the 175,00 that was expected, and the unemployment rate dropped to 3.7%, better than the 3.9% expected. Also, and maybe more concerning, is that wages moved up more than expected.
That all sounds positive for the economy, and it obviously is, but what the investors really want is for the Fed to stop raising interest rates and as we said, start cutting them next year. This jobs report gave them no catalyst to do either. That was why the stock market initially reacted very negatively to the report, but we still have the underinvested looking to buy any dips, and cash levels are very high giving the bull market outlook more ammunition.
The bond market seemed to get the picture regarding the strong jobs report as yields popped higher, and the 10-year Treasury Yield has held at the 200-day EMA so far. A modest relief rally in yields may not hurt the stock market, but a more meaningful move higher here most likely will.
The dollar also moved up on the economic data, but the stock market brushed that off as well. The UUP chart is actually quite a bit off its lows right now and that inverted head and shoulders pattern looks bullish for the dollar if it can break through that 104 - 104.5 area.
Higher yield and a stronger dollar could put an end to the rally but then again, in about a week and a half we move into the strongest seasonal stretches of the year for stocks.
So, that makes this week that much more important because there is a 2-day FOMC meeting this week culminating with a monetary policy statement on Wednesday afternoon. There is little chance that the Fed will act at this meeting but we will certainly get clues from them about what they are thinking.
Between now and then we will get another CPI report on Tuesday, and the PPI on Wednesday morning. It is likely that the Fed already has this information but what is more important to the stock market is what investors believe these numbers will do.
I continue to bring up this data because it is consequential to the strength of the dollar. The Fed balance sheet continues to get reduced, and unlike Quantitative Easing that we had for years helping to keep a breeze at the back of the stock market, quantitative tightening could be a headwind. The average 401K investor isn't watching this, but money managers sure on. It may be why many managers are lagging the market year (as am I) because the stock market has been plowing ahead despite this 2023 development
Here's a longer term view of the balance sheet and two things stick out to me. Quantitative Easing started in 2008 during the financial crisis and you can see that the balance sheet was growing from 2008 through the peak in 2022 when inflation became a concern and the bear market started. There was a blip in 2018 and it's no coincidence that the prior negative year for the S&P 500, before 2022, was 2018.
So that's a little macro analysis but right now the market is enjoying the seasonal benefits of December, although the next week and a half it is still a little vulnerable until about the 21st when Santa Claus usually takes over.
The S&P 500 (C-fund) has been hanging around that July peak for a while now. We now have two significant inverted head and shoulders patterns on this chart that barely filled in the right shoulder. I honestly don't know what to make of it. Is it a sign of strength? A sign of unfinished business that must be addressed? I didn't even mark the open gaps, which I have been obsessed with since we know gaps tend to get filled. They are large and will almost certainly get filled at some point, but at this point it could take months or years. But the point here is that a move down to 4400 would satisfy a lot of technical issues with this chart -- filling in a gap and forming the right shoulder. Will it happen before the end of the year, or very possibly afterward, when Santa has left the building.
DWCPF (S-fund) has been en fuego since the October low. It's flirting with the September peak now and there is an open gap near 1860. The momentum is clearly on the bulls' side and September has been good to small caps over the years. But you can see how stretched the chart is. Not that it can't go higher, but it is getting vulnerable to a pullback at some point. That 100-day EMA in orange has acted like a magnet this year so a pull back to that line (currently 1743) is possible at some point in the near futures (weeks to months.)
EFA (I-fund) is also extended as it climbs that long trading channel higher. A close below 73 could trigger more selling as it would push it below the blue channel. If the dollar does breakout (see UUP chart in top area) then it would give investors a good reason to take profits here.
BND (Bonds / F-fund) was down sharply on Friday but it remains in the ascending channel. Too far, too fast seems like a reasonable excuse for this to pause or pullback, and the CPI and Fed this week could be the catalyst.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
