The September jobs report was unquestionably strong. It beat expectations solidly and substantially raised the likelihood that the Fed would raise interest rates at their meeting in December.
Despite the unequivocal nature of the news, the market reaction was quite tepid. We had very mixed and inconsistent action under the surface with strength in the Nasdaq and small-caps but some weakness in the DJIA and S&P 500. Financial stocks jumped on the prospect of higher rates, but it was semiconductors that led the strength. Momentum names were generally positive but new highs were still only hitting around 200.
Most notable today was the outperformance by small-caps. Some of that is due to relative strength in small and regional banks, but there was obviously some interest in taking on some higher levels of risk.
The bears are still thinking that the market is not going to react favorably to interest rate hikes. The fact that the growth in corporate earnings is so slow has to make you wonder about why the Fed is so anxious for "lift off." But, if nothing else, it is good to have some greater clarity, even if it is for questionable reasons.
The conditions for a pullback on the news were quite good. We were somewhat extended and a "sell the news" reaction was anticipated but the "good news is bad" thinking never took hold today.
The bulls still have control of the trend and you can bet that next week we will be hearing plenty of arguments for why a December hike spells market doom. Until the price action shifts, it is best to ignore the pessimists.
Have a good evening. I'll see you on Monday.
Nov. 06, 2015 | 13:01 PM EST
Not What the Bears Were Hoping For
- The market loves to love the Fed..
Given the build-up into the jobs report today the reaction to the much better-than-expected news is quite mild and very mixed. There is a big disconnect between the action in the senior indices and the small-caps, which is likely due to the higher weighting of regional banks and financials in the Russell 2000 (IWM). Those banks are liking the idea of higher rates and a steeper yield curve and that is the main thing helping the action today.
Breadth is also very mixed, with 950 gainers to 2,100 losers on the NYSE, but 1,500 to 1,200 positive on the Nasdaq. Semiconductors and financials are helping while the "FATMAN" group is very mixed.
It's very uneven action and particularly challenging if you are trying to play overall market direction with index ETFs. We are definitely holding up much better than the bears hoped as once again they have overestimated the market's inclination to dwell on bad news. As I've often said, the market loves to love the Fed and that is why the suggestion that they are more likely to hike rates isn't hurting us.
I'm still digging for ways to put more capital to work. It isn't easy and that to me is a far more difficult task than evaluating overall market direction.
Nov. 06, 2015 | 10:31 AM EST
The Market Is Struggling to Decipher the Fed's Mixed Messages
- Breadth is poor and gold and biotech are once again getting hammered.
The challenge of the market at this point is that it doesn't seem to really know what it wants. It has been confused by all the mixed messages from the Fed recently -- and that is alleviated to some degree with the strong jobs numbers this morning, but there still are plenty of questions about how hawkish the Fed might be.
In addition to the lingering questions about what the Fed may do next, the market doesn't really seem to know if higher rates are good or bad. Arguably, rates are going up because the economy is strong -- and there is enough inflation to justify it -- but many market players think that is highly illogical. Just look at what is happening to corporate earnings. There is no growth, there. How can we justify higher rates when S&P 500 earnings are slowing and there is no inflation?
It is obvious that the Fed is looking for an excuse to raise rates because then they can claim that their policies of the past 6 years really did work. That is certainly quite questionable.
In any event, we are seeing a "good news is bad news" reaction, after some initial hesitation. Breadth is running very poor -- especially on the NYSE where it is 570 gainers to 2350 decliners. Gold is getting destroyed and biotechnology has rolled over, again. We have strength in financials and semiconductors.
I came into the day with very limited inventory and am stay selective with new buys. I did add Energy Recovery (ERII) and started a position in Mitek Systems (MITK). I also remounted a ProShares UltraShort Russell2000 (TWM) position.
Nov. 6, 2015 | 08:50 AM EDT
Jobs Numbers Means Rate Hike, but Is That a Good Idea?
- The debate over the need to raise rates will pick up some traction.
Very strong jobs news had an initial negative reaction, but we bounced back as the market does like the certainty of what the Fed will do next.
Financials are surging on the prospect of higher rates and the iShares 20+ Year Treasury (TLT) is falling out of bed.
The big battle now is going to be over whether higher rates really are a positive. While everyone will agree that it is good news to have some clarity about the timing of a rate liftoff, there is going to be quite a loud debate over whether it really is justified to start raising rates at this point.
It is obvious that Fed members want a hike because it is the only way they can claim that six years of low rates really was a good policy. A rate hike is tantamount to saying, "mission accomplished," and that is what Janet Yellen and her crew are anxious to do.
We are dancing around as the news is digested and I'm not going to try to guess yet which way we will break. The bears have a slight edge technically, as we are extended and dealing with some overhead resistance.
Overall, the big jobs news provides greater clarity into the Fed, but the debate over whether raising rates is the right move will pick up some traction.
Nov. 6, 2015 | 7:22 AM ET
All We Are Doing Is Waiting for the Jobs Number
- It needs to be either extremely good, or extremely bad.
"The beauty is that through disappointment you can gain clarity, and with clarity comes conviction and true originality."
One month ago, the market was retesting the August lows and many market players were fearful that we were going to see another leg down. We had been under pressure ever since the Sept. 17 meeting of the FOMC, when they were less hawkish than many had expected. Fed members had been making numerous comments about how interest rates hikes were likely to occur soon and the market was disappointed that we didn't have greater clarity.
Following that meeting, Janet Yellen made a speech in which she practically guaranteed a rate hike by the end of the year. Again, the market reacted negatively which set up a big response to the September jobs news.
That jobs report was surprisingly bad and made it painfully obvious that there was no way the Fed was going to hike rates at its next meeting. We exploded higher and ended up with one of the biggest monthly gains in many years.
What really caused the big move higher was that we finally had some certainty about the Fed. Fed members had been all over the place, with a variety of comments about the strength of the economy and the likelihood that a rate hike would occur soon. All this jibber jabber had confused the market and we all know that it hates uncertainty. The poor jobs news made it clear what was going to happen and that is why we rallied so sharply.
The jobs news this morning is probably going to be closer to expectations and will not provide a great amount of certainty about what the Fed may do next. Once again, Fed members are making quite a few hawkish comments and the chances of a December rate hike are about 50/50. If the jobs news is extremely good or bad, those odds are going to shift and we will see a market move. The big question now is trying to determine what the market wants.
For years, the market player wanted nothing more than friendly central bankers. They wanted low interest rates forever and that is what they got. After six years, it is pretty clear that quantitative easing really hasn't moved the needle much as far as helping the economy and many are now anxious to see rates normalized.
The market really wants certainty more than anything right now. They want to see clear evidence that things are improving and that the Fed can hike rates. A rate hike won't necessary see a negative reaction from the market, if we also have clear evidence that it is justified by a better economy.
The key to the jobs news this morning is whether or not it provides greatly clarity. A very big number of very bad number will do that, and there will likely be a positive reaction. In-line numbers will keep things uncertain and will give us no further information about the likelihood of a December rate hike.
We'll see what the numbers bring and then go from there. I'll be back with some comments after the news.