TheStreet.com founder Jim Cramer has boiled trading down to month-by-month segments, in which the tone for the month is set by the monthly nonfarm payrolls report. As is often the case, Jim has been dead right the past two months, as stronger-than-expected BLS employment reports have pushed the market to strong performances.
The S&P 500 rose 3.5% in July and had started August on a roll, posting all-time highs on multiple days. I use the past tense to describe August because I think Friday's events in Jackson Hole changed the narrative for the U.S. markets heading into September and beyond. After Friday's midday reversal, the S&P 500 is now down -- albeit only 0.2% -- for August, and I believe the game has changed.
When the Fed is thought to be complacent -- dovish, if you will -- strong economic data is necessarily a good thing for the markets. After the terrible growth in output recorded in the U.S. economy in the first half, a stronger tone to two consecutive employment reports put the market at ease. It's the best of all worlds: an inactive Fed and an economy that is heating up.
Well, Friday's comments by Stanley Fischer show that the FOMC is ready to take action. Against a backdrop of a year in which the FOMC's own "dot plot" predictions called for four rate hikes before the year started but by mid-August the market (via the CME's FEDWatch tool) was calling for zero rate hikes in 2016, the inflection point is clear.
Fischer noted Friday's jobs report as a key indicator for his thought process on a potential rate hike going into the next Fed meeting on Sept. 20-21. That's the inflection point. No longer is a "blowout" jobs number a great thing for the bulls, because if Friday's nonfarm payrolls headline figure is well into the 200,000s the Fed is going to have all the more reason to raise rates in September.
So, we need to recalibrate our expectations. The financial media love these binary descriptions of everything, as the seemingly endless race to "dumb down" the American populace is in full swing. So in their parlance, a stronger-than-expected jobs report Friday may not be "good." It could even be...perish the thought..."bad."
We'll see. I'm seeing a consensus of 180,000 for non-farm payrolls growth for August, an estimate that is hard to justify because as I have written in prior Real Money columns, the methodology used to compile the payrolls data is so extraordinarily non-scientific and unreliable. Fischer (LSE and MIT) and Yellen (Brown and Yale) are quite well-educated, so they must know better than I.
In any event, Mr. Market (school of hard knocks) is never wrong, and if he is actually looking or a "Goldilocks" report Friday, then the chances for disappointment are elevated.
How to play that? I'm sticking to my call to go long September VIX call options. In my column of two Fridays ago, I first presented this trade, and thus far it's been a winner, with the September $12.00 calls I noted in my Real Money piece now trading at $3.90 vs. $3.00 when I published the column. Cash back! As options traders could tell you, though, a 30% gain in one trading week is not an uncommon occurrence. I think volatility is still understated, and I think those September VIX call options still have room to run, so I plan to keep holding them through Friday's jobs number.
