The Alice-In-Wonderland Market
“When I use a word,” Humpty Dumpty said, in a rather scornful tone, “it means just what I choose it to mean – neither more nor less.”
— Through the Looking Glass: Alice in Wonderland
Humpty, meet the U.S. Bureau of Labor Statistics. You have a lot in common.
Friday morning (Oct. 3) the BLS released the payroll data for September, to loud cheers from all sides: Not only were there many more new jobs than expected, but the dismal August payroll numbers were also revised upward.
The market jumped on the numbers. Even before the open on Friday the S&P 500 (SPX) accelerated the rally that began like clockwork at noon the previous afternoon. The low-volume melt-up continued into the close. The SPX, which went straight down about 75 points from the Monday open, bounced back 41 points to avert what had been looking like the crack in the market everybody is watching for. Bartender! More champagne!
We Are Not Amused
But if this is the good news, we aren’t laughing. We think the bounce that saved the market, at least for a weekend, was pretty unconvincing. And, the Bureau of Labor Statistics payroll data, which look so nice and shiny on the surface, are filled with nasty little surprises that feel like a lot of time bombs waiting to explode.
In Wonderland, nothing is entirely what it seems.
Lets deal with the BLS first. The September payroll report showed an increase of 248,000 new jobs in September, and the August report was revised up from 142,000 to 180,000 new jobs. The unemployment rate fell to 5.9%, the lowest level since 2008.
Sounds great. But:
• The unemployment rate fell because fewer people were counted as being in the workforce. There were 248,000 new jobs, but 314,000 people stopped being worker bees. The effect was to reduce the nominal unemployment rate again … just in time for the election.
• About the only people who found jobs in September were grandparents. The prime working age cohort, age 25 to 54, actually lost 10,000 jobs in September. But there were 230,000 new jobs added – 92% of the total – in the 55 to 69 age group. Of course, a lot of those jobs were of the Wal-Mart greeter variety, but a paycheck is a paycheck. Just don’t talk about retiring.
• And here’s the most dismal number of all: in October 2008, in the throes of the financial crisis, the civilian workforce was about 155 million; at the end of September, 2014, six years later, it was about 156 million. But the working age population increased by 14 million in the same period. There are 14 million new workers; but only 1 million new jobs.
It doesn’t take a Nobel Laureate to figure out that this doesn’t hold much promise for economic recovery. The grandparents aren’t earning enough to be heavy spenders, and they made all their big-ticket purchases decades ago.
They aren’t going to be buying new houses and filling them with appliances. They already have a house… and their kids are living in the basement.
What Does This Do To The Market?
Nothing good. To the extent that fundamentals still matter – and they matter much less than they used to – the jobs report is glossing over problems that have been bubbling in the background for decades.
And, the markets, which have been incredibly strong until now, may be faltering. The price action last week – heavy volume on down days, almost no volume on up days – indicates a lack of conviction.
The intermediate and long-term trends are still positive, but we don’t think the correction is finished yet.
There is a real possibility the high posted on Sept. 19, just a few ticks below 2020, will be the top for the year, and we are likely to see declines down to retest the long-term and intermediate-term uptrend lines before the end of the year. The SPX is now below its 50-day moving average.
Small cap stocks are still stalling – the Russell 2000 hasn’t regained the highs made in the early summer – and the failure to recover when the large caps are moving up has the feeling of an early warning we shouldn’t ignore.
For the very short-term, we expect Friday’s rally will carry over into Monday and possibly Tuesday. The important inflection point is around 1975-78; if the market cannot move above that level, expect further declines.
For traders of the E-mini futures (ESZ4) 1978 is the line to watch. A move above that level will negate the pattern we see developing, which is an A-B-C correction. Failure to move above that resistance will send the market back down, with 1935 a likely target.
The major support levels: 1950-48, 1935.75-38, 1928-29, 1918-16
The major resistance levels: 1972.50-1975, 1985.75-84, 1991-90.50
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