After a more favorable jobs report, if you want to call a weaker than expected jobs report favorable, stocks rallied in the morning on Friday. This came on the heals of Thursday's extremely strong ADP employment report that scared the market and sent stocks reeling. Perhaps the selling was an overreaction because buyers showed up on Friday morning to buy the less inflationary June monthly Jobs Report result. But by early afternoon, the buying stopped, and the selling resumed and the big morning gains turned into modest losses.
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Investors and analysts were expecting the June Jobs Report to come in with a gain of 220K jobs, but it came up light at +209K. This was good news as far as inflation goes after Thursday's super jobs market scare with the ADP report that nearly doubled estimates. Why the difference? Good question. Someone seems to have gotten that jobs data wrong.
It doesn't seem like a big deal to the average investor saving for retirement, but it's telling a story, and the problem is that the muddied waters are making it tough to figure out how this story ends.
Below I have a lot of what many would considered boring information, but it could be canary in the coalmine as far as figuring out what is happening and what may happen next.
Mom and pop investors aren't thinking about this stuff and they, and most investors with a 401K, TSP, and pension fund, etc., are making automatic deposits into those accounts with each paycheck, and that does fuel the market -- until it doesn't and they start withdrawing. Not to get too hyperbolic about it, but that's the way it goes. The smart money sees things before we do. If the market starts coming down, mom and pop may not notice until the market losses make the evening news, and by then a lot of the damage may already be done. By the time mom and pop react and start selling we are probably closer to the end of the decline than the beginning, but like we always say, the market can move in one direction or the other a lot longer than seems reasonable.
OK, too much drama. My point is, I'd rather be one of the first people out with the smart money, rather than waiting until mom and pop realize what's happening.
Is a crash coming? I don't know. Are we about to enter another bear market or get a recession? I don't know. Are we seeing signs of trouble based on rising interest rates, inflation, the Fed balance sheet, an inverted yield curve, a national debt that will rise exponentially with interest rates rising? OK, I threw in that last one for dramatic purposes, but that's an issue we'll be hearing a lot about in the coming years. If interested, here's more on that.
I won't go too much into detail since it would take a while to explain, and I talk about this stuff often in bits and pieces so many of you regular readers know what I'm saying already. This is a slow moving ship and not something we may have to worry about today, but it will impact all of us at some point. let's be ready.
OK, first we'll talk about yields and how quickly they've risen lately. Higher yields not only make the cost of doing business higher, including mortgage rates, business and credit card loan payments, etc., but they make the bond market a viable place to put investment money when you can get a guaranteed return for X amount of years. When interest rates were near 0% for years, there was no other game in town but the stock market. Now investors have a choice - stocks or guaranteed decent returns in bonds relative to prior years.
Last week the 10-year Yield moved back above 4% for the first time in several months, and in March we saw the S&P 500 fall about 200-points right after it happened. Right now it is testing that March high so perhaps, from a technical analysis standpoint, it could see a double top pullback, now that the blue bull flag has reached its upside target area. However, if this charts blasts through the 4.1% area, the stock market could get cranky again.
The dollar fell sharply on Friday after the weaker than expected jobs data. A weaker dollar tends to help the market by moving prices of anything traded in dollars, up. It is sitting at some crucial support right now near 28.20.
One thing that will keep the dollar strong, and what may have contributed to last weeks initial rally in the dollar, was the fact that the Fed's balance sheet has been declining steadily since they stopped assisting the regional banks in March, and returned to tightening. They reduced their balance sheet by another $40 billion last week. This is the opposite of Quantitative Easing (QE) that we saw for years after the financial crisis, and they actually call this Quantitative Tightening (QT). Higher interest rates makes money more expensive to get, and QT makes money less available. This combination is a burden on economic growth.
Then we have the Inverted 2-year / 10-year Yield Curve. Actually almost all bond yields are inverted right now with shorter term bonds paying more than longer-term bonds, which isn't normal. Without going into why and what, since you probably know as much as I do, I do know that an inverted 2/10 yield curve has almost always preceded an economic recession, and it's been inverted for over a year now.
As for the stock market, it is not the inverted yield curve that hurts it. As a matter of fact this chart that goes back about 25 years shows stocks did well while the yield curve was inverted. The problem comes when it gets itself out and starts to steepen again, and that hasn't started to happen yet. It usually happens when the economy is getting into the recession that the yield curve is predicting. The jury is still out on whether or not we get that recession, but history suggests it's practically a done deal.
Notice that that the S&P 500 ($SPX) performed worse while the yield curve was steepening higher out of inverted territory.
OK, so we have some warnings signs, but the stock market has been doing fine so maybe things are OK. As I said above, the smart money and the less savvy investors are not looking at the same thing, and I'll bet your co-worker in the next cubical isn't too worried about all of that. Should we be?
One interesting development last week, which may or may not be a new trend, is that the smaller broader indices out performed the S&P 500 with all its big tech market leaders. The RSP (equal weighted S&P 500) and the $SPX are the same 500 stocks. The $SPX weighs the bigger companies more heavily than the smaller ones in the S&P 500. On Friday the S&P 500 ($SPX) was down 0.28%, while the RSP (same stocks remember) was up 0.26%. This could be a good sign for the broader S-fund over the C-fund if it can continue.
It's too early to say because a rising tide raises all boats and a falling tide will bring all boats down, but one could outperform the other, and that's good information to have if you're debating between which funds to bet more heavily on when in stocks.
We will get the CPI report on Wednesday before the opening bell, and being the last one before the Fed's July FOMC meeting, it could be more of a market mover than the jobs reports we just had.
The S&P 500 (C-fund) rallied early after the release of the jobs report, but inevitably it filled Thursday's open gap and then retreated again. The losses weren't consequential but the decline from the intraday high to the close was. This year we have seen a lot of reversal days that didn't lead to what we might typically expect, so whether this negative reversal leads to more downside is more debatable than a technical certainty. There's some rising support 4380 and 4375 and the bulls need those to hold otherwise the next levels of support are painfully lower. The PMO indicators just crossed back below its moving average, and sometimes the second time is the more meaningful indication.
DWCPF (S-fund) closed well off its lows but, as opposed to the S&P 500, it held onto a good portion of its Friday morning gains so it is not showing as bad of a negative reversal as the C-fund right now. The gaps above 1470 have now all been filled, and the open gaps below may be eventual targets, but they are far enough below to not worry about them at the moment. I'm more concerned about the 1710 - 1720 area holding.
EFA (I-fund) also held onto solid gains and once again it was a big move in the dollar that was the catalyst. There's open gaps all over this chart, as usual, but I believe it is what happens to the dollar that will impact this most. The Fed's balance sheet reduction should keep the dollar buoyant, but this chart suggest that the strong jobs report on Friday was a bigger factor as it broke below support.
BND (bonds / F-fund) broke down from its bear flag last week. That is something I should have seen coming but in my mind I saw it relentlessly trying to break above those moving averages, and I was not expecting that unusually strong ADP employment report on Thursday that ended up tanking the chart. Now, it's down and out and may likely try to fill in those open gaps below, although there is now a large gap above as well near 72.
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.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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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Investors and analysts were expecting the June Jobs Report to come in with a gain of 220K jobs, but it came up light at +209K. This was good news as far as inflation goes after Thursday's super jobs market scare with the ADP report that nearly doubled estimates. Why the difference? Good question. Someone seems to have gotten that jobs data wrong.
It doesn't seem like a big deal to the average investor saving for retirement, but it's telling a story, and the problem is that the muddied waters are making it tough to figure out how this story ends.
Below I have a lot of what many would considered boring information, but it could be canary in the coalmine as far as figuring out what is happening and what may happen next.
Mom and pop investors aren't thinking about this stuff and they, and most investors with a 401K, TSP, and pension fund, etc., are making automatic deposits into those accounts with each paycheck, and that does fuel the market -- until it doesn't and they start withdrawing. Not to get too hyperbolic about it, but that's the way it goes. The smart money sees things before we do. If the market starts coming down, mom and pop may not notice until the market losses make the evening news, and by then a lot of the damage may already be done. By the time mom and pop react and start selling we are probably closer to the end of the decline than the beginning, but like we always say, the market can move in one direction or the other a lot longer than seems reasonable.
OK, too much drama. My point is, I'd rather be one of the first people out with the smart money, rather than waiting until mom and pop realize what's happening.
Is a crash coming? I don't know. Are we about to enter another bear market or get a recession? I don't know. Are we seeing signs of trouble based on rising interest rates, inflation, the Fed balance sheet, an inverted yield curve, a national debt that will rise exponentially with interest rates rising? OK, I threw in that last one for dramatic purposes, but that's an issue we'll be hearing a lot about in the coming years. If interested, here's more on that.
I won't go too much into detail since it would take a while to explain, and I talk about this stuff often in bits and pieces so many of you regular readers know what I'm saying already. This is a slow moving ship and not something we may have to worry about today, but it will impact all of us at some point. let's be ready.
OK, first we'll talk about yields and how quickly they've risen lately. Higher yields not only make the cost of doing business higher, including mortgage rates, business and credit card loan payments, etc., but they make the bond market a viable place to put investment money when you can get a guaranteed return for X amount of years. When interest rates were near 0% for years, there was no other game in town but the stock market. Now investors have a choice - stocks or guaranteed decent returns in bonds relative to prior years.
Last week the 10-year Yield moved back above 4% for the first time in several months, and in March we saw the S&P 500 fall about 200-points right after it happened. Right now it is testing that March high so perhaps, from a technical analysis standpoint, it could see a double top pullback, now that the blue bull flag has reached its upside target area. However, if this charts blasts through the 4.1% area, the stock market could get cranky again.
The dollar fell sharply on Friday after the weaker than expected jobs data. A weaker dollar tends to help the market by moving prices of anything traded in dollars, up. It is sitting at some crucial support right now near 28.20.
One thing that will keep the dollar strong, and what may have contributed to last weeks initial rally in the dollar, was the fact that the Fed's balance sheet has been declining steadily since they stopped assisting the regional banks in March, and returned to tightening. They reduced their balance sheet by another $40 billion last week. This is the opposite of Quantitative Easing (QE) that we saw for years after the financial crisis, and they actually call this Quantitative Tightening (QT). Higher interest rates makes money more expensive to get, and QT makes money less available. This combination is a burden on economic growth.
Then we have the Inverted 2-year / 10-year Yield Curve. Actually almost all bond yields are inverted right now with shorter term bonds paying more than longer-term bonds, which isn't normal. Without going into why and what, since you probably know as much as I do, I do know that an inverted 2/10 yield curve has almost always preceded an economic recession, and it's been inverted for over a year now.
As for the stock market, it is not the inverted yield curve that hurts it. As a matter of fact this chart that goes back about 25 years shows stocks did well while the yield curve was inverted. The problem comes when it gets itself out and starts to steepen again, and that hasn't started to happen yet. It usually happens when the economy is getting into the recession that the yield curve is predicting. The jury is still out on whether or not we get that recession, but history suggests it's practically a done deal.
Notice that that the S&P 500 ($SPX) performed worse while the yield curve was steepening higher out of inverted territory.
OK, so we have some warnings signs, but the stock market has been doing fine so maybe things are OK. As I said above, the smart money and the less savvy investors are not looking at the same thing, and I'll bet your co-worker in the next cubical isn't too worried about all of that. Should we be?
One interesting development last week, which may or may not be a new trend, is that the smaller broader indices out performed the S&P 500 with all its big tech market leaders. The RSP (equal weighted S&P 500) and the $SPX are the same 500 stocks. The $SPX weighs the bigger companies more heavily than the smaller ones in the S&P 500. On Friday the S&P 500 ($SPX) was down 0.28%, while the RSP (same stocks remember) was up 0.26%. This could be a good sign for the broader S-fund over the C-fund if it can continue.
It's too early to say because a rising tide raises all boats and a falling tide will bring all boats down, but one could outperform the other, and that's good information to have if you're debating between which funds to bet more heavily on when in stocks.
We will get the CPI report on Wednesday before the opening bell, and being the last one before the Fed's July FOMC meeting, it could be more of a market mover than the jobs reports we just had.
The S&P 500 (C-fund) rallied early after the release of the jobs report, but inevitably it filled Thursday's open gap and then retreated again. The losses weren't consequential but the decline from the intraday high to the close was. This year we have seen a lot of reversal days that didn't lead to what we might typically expect, so whether this negative reversal leads to more downside is more debatable than a technical certainty. There's some rising support 4380 and 4375 and the bulls need those to hold otherwise the next levels of support are painfully lower. The PMO indicators just crossed back below its moving average, and sometimes the second time is the more meaningful indication.
DWCPF (S-fund) closed well off its lows but, as opposed to the S&P 500, it held onto a good portion of its Friday morning gains so it is not showing as bad of a negative reversal as the C-fund right now. The gaps above 1470 have now all been filled, and the open gaps below may be eventual targets, but they are far enough below to not worry about them at the moment. I'm more concerned about the 1710 - 1720 area holding.
EFA (I-fund) also held onto solid gains and once again it was a big move in the dollar that was the catalyst. There's open gaps all over this chart, as usual, but I believe it is what happens to the dollar that will impact this most. The Fed's balance sheet reduction should keep the dollar buoyant, but this chart suggest that the strong jobs report on Friday was a bigger factor as it broke below support.
BND (bonds / F-fund) broke down from its bear flag last week. That is something I should have seen coming but in my mind I saw it relentlessly trying to break above those moving averages, and I was not expecting that unusually strong ADP employment report on Thursday that ended up tanking the chart. Now, it's down and out and may likely try to fill in those open gaps below, although there is now a large gap above as well near 72.
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.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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.
