Has the market recovered from the beginning of the year sell off? What has changed to bring back confidence to the equity markets? Were we oversold? Is the U.S. economy stronger or weaker? What will the Fed do next (raise rates, pause, perhaps lower rates)?
These are the questions swirling around the financial markets, and even the smartest minds are disinclined about offering any long-term projections. Too much remains an unknown and amidst the economic/market volatility we are saturated with the circus of the political election cycle. Sanders, the Socialist struggling to catch-up with Party-Politics Clinton and on the Right we have successful business, brash, and abrasive Trump – whom some in his own party has shunned. Things couldn’t be more uncertain.
Last week I wrote about uncertainty, the force driving market volatility. Heisenberg’s uncertainty principle, which ironically is often misunderstood, states that we cannot measure the position (x) and the momentum (p) of a particle with absolute precision. The more accurately we know one of these values, the less accurately we know the other.
In some respects Heisenberg’s principal applies to the current Fed monetary policy between the amounts of interest rates vs the momentum of which they will change (raise, pause, or lower). I don’t even think the Fed knows what they will do next. The only certainty is that the Fed members are not even in agreement.
Tomorrow is the monthly Labor Report and many eyes will be watching it closely. It is a key economic indicator that many believe is the principal driver in the Fed’s monetary policy decisions. Of course my position is that it is more window dressing and will certainly play a role in this year’s election. Yet, despite my skepticism of its accuracy or its weight on Fed monetary policy, it is the perception that will drive order flow into or out of the equity and bond markets.
The ADP is the private sector labor report that is released prior to the Labor Report. It is a rather good gauge of what to expect from the Labor Report, while giving us a better resolution of the private sector job landscape. ADP reported 214,000 jobs created in the private sector vs. the 190,000 expected. While it was better, there was concern that the majority of jobs came from the service sectors, while manufacturing actually lost 9,000 jobs in February. Economist are concerned about the shifting job sector to services, much of which is unskilled labor. Additionally January’s ADP report was revised down from 205,000 to 193,000.
TrimTab generates their reports based on real-time withholding taxes. There report was rather dismal and concerning. Here is a quote from their report:
“The U.S. labor market is weaker than the conventional wisdom believes. We estimate based on real-time income tax withholdings that the U.S. economy added between 55,000 to 85,000 jobs in February, down from 175,000 to 205,000 jobs in January. Last month’s growth was the lowest since July 2013.
We cite a range rather than a single figure for our February estimate because the timing of bonus payments impacts withholdings at this time of year and makes our year-over-year analysis more challenging than usual. Part of the sharp deceleration in wage and salary growth in February was likely due to shifts in bonus payments, but the deceleration was too sharp to be explained by bonus-related factors alone.
Our estimate is not an attempt to predict the initial estimate that the Bureau of Labor Statistics (BLS) will report on Friday. The BLS data is subject to so many seasonal adjustments and so much statistical manipulation that we have no way to know what the BLS will report.”
While it is not worth the effort to predict what the Labor Report will state, what we can derive is the market action from the report. Current expectations are 190,000 to 200,000.
Strong Labor Report: > 250,000
The stronger the Labor Report, the higher the perceived probability the Fed will raise rates again and this will stall the equity markets, send bonds lower, and yields higher. We could see the market initially rally into the resistance levels and then begin to sell-off, as expectations of another rate hike will begin to set in.
In Line or Weak Labor Report: 175,000 to 225,000
If however, the Labor Report is in line or slightly weaker than expected, the higher the perceived probability that Fed will pause rates and this will give the equity and bond markets a pause or perhaps push it higher. This is the most likely scenario, with enough room to spin optimism and also caution as it pertains to the economy and Fed rate decisions.
Dismal Labor Report: < 150,000
Of course a dismal report will drive the perception the Fed could perhaps lower rates and bring the talk of NIRP (Negative Interest Rate Policy) back to the forefront. This could, ironically, boost markets as it will drive debt formation and more leverage as we have seen over the last few years.
The markets have rebounded off the double bottom and are at the previous support levels from the start of the year (now perhaps resistance levels). No doubt there are sellers waiting in the wings ready to sell after their wild ride, in an effort to exit the market with some retained earnings. Yet they will wait for the Labor Report prior to making any decision. Ironically the Labor Report comes at an interesting time in the recent market action, right at the resistance levels or are these support levels. Perhaps we should consider this a pivotal point in which we can see a strong rally or another sell-off. The catalyst will be the Labor Report and how the market will interpret it. Of course we will have to filter the spin from heavily bias reporting and focus on the math. Unfortunately even the math in the Labor Report is fuzzy math at best and statistical bias at worst.
Positioning For Action (Option Position Traders)
For traders, this is a time where Vega is starting to get fairly cheap. VIX has moved down sharply and back to the 16-17 level. Staying Delta Neutral with Gamma into tomorrow’s Labor Report means you may have some great action to trade against the Gamma and profit in any big move – up or down. I would be hesitant to lean Deltas too much against Gamma, perhaps staying in the 1:1 range.
Support & Resistance
INDU 16,600 – 17,000
A strong move into 17,000 will certainly be met with selling pressure. If sellers step-away we could see a strong rally that could be fueled by short-covering into the 17,200 area. To the down side I would look at the 16,600 area for the first lines of support.
SPX 1940 – 2000
The SPX is in a very similar position to the Dow Jones. A strong rebound off the double-bottom move, but now facing possible resistance. Tomorrow’s Labor Report may very well be the catalyst to drive this market higher and through 2000 or back down to the 1940 level.
NDX 4200 – 4400
The tech heavy index has certainly has been volatile with some rather large gapping moves. Remember an over-weight stock in this index can help drive this index and generate gapping situations. I would expect to see some selling pressure step in at 4400 and support down in the 4200 range.
The Russell index, which I watch fairly closely for general market order flow has shown some optimism after breaking higher last week above the 1040 area. This index has room to run higher and seems to want to move higher after last week’s strong close. 1100 is certainly in the cards before resistance sets in. Right now order flow is not showing any hesitations to get long. Today’s action will be setting up for tomorrow and we may see some take positions off into the close if we stay elevate as to not risk tomorrow’s Labor Report.
The markets have seen a good bounce off the bottom. The Russell is showing optimism pushing through some resistance areas. These are short-term good signs. However, we must be cautious a short-term rally does not make for a bull market and we are still off the highs of the year.
There is also a balancing act the Fed is trying to maintain. It is a balance between creating the perception of a positive economic growth and their monetary policy. While actions and math are clearly the reality, it is perception that will drive transactions.
The Labor Report is one of the biggest drivers of that perception and therefore can become a catalyst event for market action. We have recovered a good portion from the lows, is it time to take some off the table? I would certainly hedge these gains as we wait for tomorrow’s Labor Report.