The major indices broke supports and have visited some lows. Blame has been tossed around from North Korea’s supposed bomb test to Saudi Arabia’s relation with Iran. The boring reality is the flow of capital, which is controlled by interest rates, margin (leverage), and money supply. As the Fed Co-Chair mentioned, the Fed’s policy (QE + ZIRP) created a three-year bull market. It is what I have been saying for years. The problem is you can only fuel (monetize) leverage spending at a pace faster than private sector growth (revenue) for so long. Eventually, either you top out or private sector growth (revenue) catches up to continue to fund the spending spree. Of course there is a third option, which is the one we are actually heading down and that is the Fed injecting another round uber-stimulus (QE, ZIRP, TALF, Operation Twist, something). The rest of the world’s government are accelerating their printing (stimulus) to prosperity, we of course (if you are a Keynesian) have no choice but to follow. No one likes the pain of financial responsibility.
There needed to be some good news to give the market a pause from the New Year sell-off. Many were hoping and looking toward the Labor Report that came out this morning as the savor from this death spiral. However, is good news really bad news?
The Labor Report surprised everyone with a massive jump in non-farm payrolls at 292,000 jobs created during December. That was far from the 200,000 jobs expected. It is certainly one economic data point of good news in a sea of weak economic data. Holiday sales in many sectors missed, manufacturing decline sharply, shipping tonnage down 3 out of the last 4 months, exports declined widening the trade deficit, corporate profits growth are contracting, and it looks like 4th quarter earnings are going to be significantly weaker than anticipated. The sea of bad news has led many economists to predict a mild recession in 2016 and stagnation at best. So having a massive upside surprise headline jobs number was sure to inject, if brief, a moment of hope.
Courtesy of FRED
The pre-market futures knee-jerked higher on the news, but I am not sure if it will last. Dow futures spiked up to 200+ points, but that has already come off as I type this morning. It does seem like an anomaly as all the other economic data looks to be weaker. One has to consider that if corporate profits are down and earnings weaker, with more announced layoffs in the 1st quarter, you begin to wonder if we can have continuing strong +275,000 per month job creation. It certainly has some skeptical, not necessarily of the jobs report, but whether if this is a realistic trend to expect.
Silly Rate Hike Talk
What I do find silly is that this one jobs report for December has already fueled the “Fed is going to hike rates again” talk. Seriously, is this the harbinger of 2016 in which the entire market wonders from FOMC meeting to FOMC meeting if the Fed will or will not hike rates? Which will only drive more volatility into the market. I was hoping that the silliness of 2015 Fed rate hike talk would be over, but it looks like we just can’t shake those expectations. When can the market value and investments be based solely on the soundness of earnings reports, value determinations, growth expectation, same-store sales, and all the data in which we are supposed to value investments. We have become so reliant on Fed expectations that any consideration about fundamental and value investing has been thrown out the window. Even Warren Buffet had one of his worse investment years in 2015. One must be a master of Fed expectations and how the market will react.
Courtesy of FRED
While we continue to focus on the Fed Rate Hike expectations and the Job’s Report, the only two things that seem to matter if you watch CNBC, we should really pay attention to the dollar value (DXY), money supply vs. velocity, and the yield curve. Those will be key indicators of commodity prices, actual changes in rates, and ultimately inflation. The tail that wags the Fed Dog is really the dollar and the currency war – that determines the monetary rate of inflation. Fed also has a money dam (money supply with no velocity) they have to keep from breaching.
Good news is bad news?
I believe as the great jobs report sinks in and the talk of Fed Rate Hikes crescendo the market will realize that a rate hike is bad news for the markets. The market really wants ZIRP so we can all continue to leverage and push up asset prices. Think about what higher rates mean; higher mortgage rates (stalling the housing market), higher borrowing cost (less spending), higher carry costs (lower leverage in the market), bonds decline so yield can rise, increase in savings. Once that reality sets in with those that actually believe the Fed is going to raise rates and they are Hawkish (which I do NOT believe), the market will have a harder time rallying.
Support & Resistance
We broke 16,800 and have visited 16,400. We could get a bounce in here and perhaps a consolidation as the Job’s Report gives hope that the economy is better, but brings anticipation that the Fed would hike rates could create a sell off. I think the low is really in the 16,000 range if we breach the 16,400 support. For now, expect some consolidation around 16,400.
We could consolidate around this level; I would look at some sloppy volatility around 4200 – 4400. Apple has been an unexpected drag, but there is a possibility that so much talk about this stock hitting a bottom could drive some speculative buyers in. That could give this index support as it is a big over-weight. It could also help the Dow Jones.
The sloppy volatile range is 1920 – 1980. If this index rallies into 1980 or declines more into 1920 try not to read too much into it. We could be in for some false starts and some knee jerk sell-offs. I think we will see some consolidation in this area – unless some other shoe drops.
My one concern about the general market order flow is seeing the Russell index smash down through 1080 and on the low. We really need to see this index get back above 1080 and close there with some strength. If we can get up in to the 1080 area on volume and close strong – it could bring confirm some support or at least consolidation in here.
Better Hedged, then Dead!
The last few months has been a time when hedging positions and reducing long delta exposure has paid off. I continue to remind those that we insure our health, car, home, and even life – so why not insure our investments. Our KFYIELD fund (conservative income fund) has done well over the last few months. It is not because we are lucky or right about direction, it is solely because we are smart and always hedge (insure our positions). It is nice to go to sleep at night and know you are not going to lose money when the market sells off. In fact, have been over-hedged since November and as the market sold off actually made money.
If your financial advisor or broker doesn’t use options to insure your investment, ask them why not and if they can’t give you a solid answer – it is time to find a new financial advisor.