The roller coaster ride continues.
Yesterday, market players felt pretty good after a bounce, and that carried over into this morning as the European Central Bank offered dovish chatter in Europe. But with a very important jobs report in the U.S. on deck at 8.30 a.m. ET tomorrow, market players decided it was better to move to the sidelines. Although breadth stayed positive, the market drifted down as the mood dampened.
There really is no reason to believe that the market has bottomed out. It is in a big trading range and has yet to form a solid bottom. The chances that it retests the lows are still high. Because the swings lately have been so big, the mood has been shifting very fast, and that causes great celebration on the good days and lots of hope that the worst is over.
The jobs report is going to be the next catalyst. What the market wants from that report is clarity about what the Fed might do next. Therefore, the best thing for the market may be a very weak number or a very strong one. An in-line report would only leave us with the same level of uncertainty (more on that in the morning).
This market is still experiencing a corrective phase. Be patient and let it play out. The opportunities are developing. All we need to do is be patient and focus on timing.
Have a good evening. I'll see you tomorrow.
Sept. 3, 2015 | 1:54 PM EDT
Jobs Jitters Make Markets Jumpy
- Risk of another bout of selling is high and tomorrow's jobs report could be the trigger.
The excitement of the dovish ECB has quickly worn off and we are now seeing mild profit-taking ahead of tomorrow morning's jobs news. The monthly job's report has always been important, but the report tomorrow is even more so as it may be the tipping point for the Fed.
If the numbers are significantly better than the 200,000 that is expected, it may be enough to push the Fed to act sooner despite the chaotic economic state of the world. The August payroll numbers have come in below expectations seven of the last 10 years, but in a number of cases were later revised higher.
What the market really wants from the jobs numbers is greater clarity about what the Fed might do. Unfortunately, that may not come easily, and that is why we are seeing weakness in the market now.
One thing that strikes me about the action yesterday and this morning is that so many market players seem willing to believe very quickly that the worst is over. While the positive action does give things a much better feel, it is important to keep in mind the context. This market is still technically broken and a couple of massive bounces aren't enough to fix it. The risk of another bout of selling is still high and it wouldn't be a surprise if tomorrow's jobs news is the catalyst.
As I mentioned, I raised some cash this morning. I am in no rush to deploy it in front of the jobs news.
Sept. 3, 2015 | 10:19 AM EDT
ECB Doves Give Flight to U.S. Markets
- But the focus is going to turn quickly to tomorrow's jobs report.
While the Fed may be making things more difficult for the market lately with its dithering on rates, there is no uncertainty in Europe, where Mario Draghi promises unlimited support to the feeble economy. That dovishness has helped give the U.S. some central-bank-driven action this morning. Markets are working higher on breadth of better than 3-to-1 positive.
While the market is celebrating and building on yesterday's momentum, the focus is going to turn quickly to tomorrow's jobs report and speculation on the timing of rate hikes by the Fed. There are still folks who believe a September hike is likely, even though there is no question that there are still major macroeconomic issues.
We have broad strength with oil coming back again. When oil strengthens, we tend to see rotation out of biotechnology, and that is happening again today.
I've used this opening strength to cut back a few things, which looks a bit premature but I'm not too concerned about the market running away. I'm all out of index longs for now. Recent buys Energy Focus (EFOI) and Google (GOOGL) continue to act well, and SolarEdge Technologies (SEDG) is of interest after an upgrade today. I'm waiting to see if any pullbacks develop intraday before doing much else. I want to be very aggressive about protecting yesterday's gains.
Sept. 3, 2015 | 7:01 AM EDT
No Reason to Believe the Worst Is Over
- Maintain a healthy dose of skepticism.
"Obstacles are as big as you personally make them."
Following the big breakdown in the indices two weeks ago, market conditions have been developing in classic fashion. We've seen a good sized oversold bounce, another pullback and a generally higher level of volatility. The best rallies tend to occur in broken markets, and we've had a couple good examples of that as well.
Although the positive action yesterday has restored some bullish optimism, it is very important to maintain a high level of skepticism. There is no reason to believe that the worst is over and that we are going to move straight back up. Plenty of folks are already anticipating another V-shaped recovery, but it is clear that macro conditions have shifted and that it is more likely that we will have a high level of choppiness, rather that the clear sailing that has so often occurred in the past.
What has changed recently isn't any mystery. China is at the forefront of the problems, as the weakness there raises concerns about the entire global economy. Continued pressure on oil and commodity prices makes it clear that there isn't enough economic strength to increase demand. Both the People's Bank of China and the European Central Bank are prepared to take further steps to try to bolster things.
The other big issue is obviously the Fed. The issue with the Fed isn't that it is hawkish or dovish but that it is indecisive and can't seem to decide if the economy is strong enough to raise interest rates at its meeting later this month. We have the August jobs news tomorrow morning and that is going to be extremely important to the timing of "lift-off" by the Fed. It will probably be better if the report is extremely strong or extremely weak, otherwise the course of Fed action will remain murky.
As we navigate this market, the most important thing to keep in mind is that bounces in a broken market are designed to suck us in. Market players are always overanxious to proclaim that the worst is over, so when we finally do have some better price action they rush in out of fear of missing out on the recovery. They have losses to make up and they want to do it immediately.
Unfortunately, the real pain of a broken market comes when the counter-trend bounces fail. It is trapped bulls and aggressive bears that can cause quick reversals when things begin to falter. If you simply sit there and do nothing, you can give back some profits in the blink of an eye.
The most important thing right now is to be clear about time frames. Are you building positions for the longer term, or are you looking to play the shorter-term volatility?
The answer to that question will govern the actions you take. If you are building longer-term positions, you need to have a plan that rations your capital and ensures that you don't average in too fast or too big. The biggest mistake that many investors make when trying to build longer-term positions is that they don't keep enough capital in reserve and then have to suffer when the market doesn't improve as fast as they anticipated.
This can be a great trading market for those with a shorter-term timeframe. As I've mentioned, some of the best rallies come in poor markets. We had one last week and we saw another good one start yesterday. It can be extremely hard to time things, but if you stay vigilant there are opportunities for good trades.
We have some positive follow-through this morning, but the focus is going to quickly shift to tomorrow morning's job report. It is one of the most important pieces of economic news we have had in a while, and there will be some jostling ahead of the event.