At the close a week ago, market players were optimistic that the corrective action had come to an end and a V-shaped move higher was about to occur. It was an understandable hope given how many times we have seen straight-up moves in recent years, but this time the corrective action played out in a more traditional manner.
We gapped down on Monday and picked up some downside momentum on Tuesday. This led to an oversold bounce on Wednesday and Thursday, but we closed poorly and never made a higher high. That was the setup for a very ugly Friday when the jobs numbers failed to find many fans.
While it was a poor day, there are some signs that we are finding support around 1910 of the S&P 500. It isn't a full retest of the lows from two weeks ago, but it does serve to shake out the overly optimistic dip buyers and gives us more bearish sentiment.
The problem is that we have no idea what is going to happen overseas and in China in particular. With the weak action that occurred while the China markets were closed, there is potential they may have to catch up to the downside. On the other hand, we can't rule out more stimulus action by the People's Bank of China. We are going to see a gap at the open on Tuesday and China is going to be given the credit or the blame for it. It is a coin toss at this point which way we open on Tuesday.
In addition to China, we still have a couple of weeks to wait for the Fed interest rate decision. There is still tremendous uncertainty over the timing of rate hikes and that looks to drag out even longer. The jobs news today did nothing to clarify the situation and action overseas may obfuscate it even more.
We can spend a tremendous amount of time reflecting on the many big-picture concerns, but the main thing we need to keep in mind right now is that technically the market is still undergoing a correction. We may be close to a low, but there is nothing solid at this point on which to base that hope. We have had a big breakdown and a big failed bounce. That does not suggest we are suddenly going to have much better action. The opportunities are coming and we need to be ready, but don't let hope cause you to act prematurely.
Have a great Labor Day weekend. I'll see you on Tuesday morning.
Sept. 4, 2015 | 10:22 AM EDT
2 Issues Keeping Buyers on the Sidelines
- · The upcoming long weekend presents a problem.
Typically on a big gap down open on news like the jobs report it makes sense to look for a quick oversold bounce. We did get a little bounce, but two problems today are keeping buyers sidelined.
The first problem is that the payroll numbers did little to clarify the interest rate situation. The chances of a September rate hike actually ticked up -- but remain quite muddled. No one seems to know for sure how much the Fed will take into account economic weakness around the world.
That brings up the second problem, which is the upcoming long weekend. China markets will reopen on Sunday night and there will be two days of trading there before we reopen on Tuesday morning. The risk of more ugly action in China is very high and that is going to keep some buyers in cash today.
Despite the sea of red out there I am seeing some relative strength in biotechnology names such as bluebird bio (BLUE), KaloBios Pharmaceuticals (KBIO), Trevena (TRVN) and Lexicon Pharmaceuticals (LXRX). I'm nibbling at a few things and feeling quite optimistic about the potential buys that are starting to set up. It's a matter of vigilance and patience at this point. If you are positioned with a high level of cash then you should be feeling pretty good.
Sept. 04, 2015 | 9:01 AM EDT
Expect A Choppy Trading Day on Weak Jobs Data
- Look for some bounce plays into the weakness on below-consensus jobs data.
The headline nonfarm payroll figures came in a bit below expectations -- at 173,000 jobs versus consensus of 217,000 -- but there were some upside revisions, and the unemployment rate dropped to 5.1% from 5.2%. Hourly wages were a big higher than expected, as well.
The numbers aren't strong enough to justify a rush for interest-rate liftoff, but they are good enough to keep a September rate hike on the table. The hawks will make the case that the employment conditions for a hike are in place.
The big issue remains whether the Fed wants to ignore the rest of the world.
Unquestionable there are some major issues -- and if Janet Yellen and her crew raise rates and the global economy continues to struggle, they will receive much of the blame. It would be a bit surprising for the Fed to risk that, but they appear to be very anxious to make the first hike and to change the tone of thought about the domestic economy. Ten years without a hike suggests that the Fed has failed, and they want to change that view.
After a brief bounce try, the market is reacting negatively to the news. My inclination is to look for some bounce plays into the weakness. I may give Google (GOOGL) another try, after success with it the last two times we had sharp gap-down opens.
Stay vigilant. It is going to be a very choppy day, but the good news is that we may have the retest of the lows that will help to clear the air a bit.
September 4, 2015 | 06:37 AM EDT
An Inline Jobs Report Would Be the Worst Outcome
-- There would still be no clear path for the Fed.
If everything on earth were rational, nothing would happen. -- Fyodor Dostoyevsky
China has received most of the blame lately for the chaotic market action, but there are quite a few market participants that believe the real culprit has been the Fed. Despite unprecedented transparency, or maybe because of it, we have more uncertainty than ever about what they may do next. The Fed's excuse for its lack of clarity is that it is data dependent and needs more information before it can make this decision.
This morning we will see a major piece of data that may determine if the FOMC hikes interest rates in a couple weeks. Because of the weak international economy many market participants believe that the Fed simply cannot commence the liftoff of interest rates right now. But several Fed members have stated that their employment goals have been met and that they believe that inflation will soon rise to the levels that will justify tightening.
The market believes that a September hike is unlikely, but today we will have an interesting session as we consider where the August jobs news is strong enough to cause pressure to raise rates sooner than later.
An inline report is probably the worst thing that could happen for the market. We will stay essentially in the same position we have been in for a while with no real clear path for the Fed. We will still need more data. If the report today is notably weak then a September hike is very likely off the table completely, which will provide some certainty for the market, but will be further proof that this economic recovery is one of the worst in history.
A strong report is going to raise the chances of a September hike and cause some concern, but we still don't know how much weight the Fed is going to place on international events. Even a very good report may still be offset by all the other negatives out there. That really is the issue that everyone is grappling with right now.
A big part of the problem is that the Fed is worried about its credibility. It doesn't want to be seen as reacting to the recent market action, but it can't just ignore that the facts of a major slowdown in China, a crash in commodity prices, the potential of deflation and so much weakness in Europe that more quantitative easing is needed.
In addition, there is pressure on the Fed to raise rates simply to justify the argument that things are improving. No one expected that we'd have an economy this weak after six years and many trillions of dollars. Raising rates is a form of victory for the Fed and its policies and many of the members are anxious to do so.
In the very early going the market is already anticipating problems. We are under pressure again as Europe ignores the dovish comments from ECB President Mario Draghi yesterday and the potential for some rocky action in China when that market reopens causing concern. With a three-day weekend coming up, there is going to be some concern about lugging much inventory.
Technically the indices are not very pretty. We are working on our second failed bounce and a lower low following the breakdown of two weeks ago. We are right in the middle of a trading range and will need a significant move to challenge either support or resistance. The bears are growing more confident of a full retest of the recent lows, while the bulls are worried that their old friend, the V-shaped move, may have deserted them.
Capital preservation is paramount right now, but the good news is that this market has needed this sort of action for a long time. We'll have to be patient while things develop, but the future opportunities continue to build as this market struggles.