Ask Goldilocks: Was Friday's Jobs Report 'Just Right'?
To be sure, the game has become a bit confusing of late.
For example, one minute the "good news is bad news," theme is the driver to the action and the next, well, not so much.
And for those investors counting on the mainstream media to help them understand why the market is doing what it doing currently, there may be a complete lack of clarity on why stocks first declined for five straight days only to reverse nearly all of the losses in four minutes on Friday's opening bell.
So, let's see if we can clear things up.
Earlier in the week, the “good news is bad news” theme clearly prevailed. Upside surprises from high-profile manufacturing (PMI and ISM), housing and auto sector data drove speculation that the door may still be open for a "Dectaper." As such, stocks would decline after each new piece of stronger-than expected economic data came in.
See also: Fair Warning - Markets Could Get Ugly!
This thought process appeared to have set up the market for a big move in response to the all-important jobs report. The thinking was that if the jobs report came in strong, stocks would decline due to the idea that the Fed would have further proof that it was time to start tapering the QE bond-buying program.
The Numbers Were Strong
So, when the Bureau of Labor Statistics reported that Nonfarm Payrolls increased by 203,000 in November (the second consecutive monthly reading over 200K) and the Unemployment Rate had taken a dive down to 7.0 percent (from 7.3 percent in October), one couldn't be blamed for thinking that the stock market was going to decline in earnest at the open.
The problem appeared to be that this was the fourth consecutive month of strong growth in Nonfarm Payrolls (average job growth has been approximately 190K a month since August). And then more importantly, the Unemployment Rate was suddenly at the target Ben Bernanke had established that would trigger the tapering of QE3.
So Naturally Stocks Reacted By...
So what happened to the S&P 500 (NYSE: SPY) in the first four minutes after the opening bell rang on Friday? The index spiked up about one percent, of course! And the buying didn't stop there as the S&P wound up finishing with a gain of 1.12 percent on the day and only a couple points away from an all-time high. The fun wasn't limited to the S&P as the DJIA (NYSE: DIA) rebounded nearly 200 points and the NASDAQ (NASDAQ: QQQ) ended the day at the highest level since the technology bubble burst back in 2000.
Is Good News Good Again? Or...
The popular press concluded that the market reaction to the strong jobs report meant that good news was now a good thing for stocks again. The idea promoted Friday was that traders have become comfortable with the notion that tapering is not the same as a hike in rates and that the overall policy normalization process will be very gradual.
While it is true that "tapering is not the same as tightening" the bottom line is that the press has it wrong.
Key: It's Really All About Goldilocks
The real key to Friday's Jobs report wasn't that "good news is good again." No, the important takeaway was that the report could be placed in the Goldilocks category.
In short, the report wasn't too hot and it wasn't too cold - it was "just right." Oh, and upon further review, turns out that the 7.0 percent Unemployment Rate number was artificial.
While the number of new jobs was above expectations and it does appear that job growth is beginning to trend higher, the total remains below "normal" recovery standards. So, while the current rate of job growth is picking up relative to where it has been, the absolute rate of growth remains sub-par.
Lies, Damned Lies, and Statistics
As for the "good news" that the Unemployment Rate dove from 7.3 percent to 7.0 percent, one needs to recognize that this month's rate was impacted by a boatload of Federal employees returning to work after the government shutdown. Therefore, the big drop was clearly artificial.
In addition, Fed officials have gone out of their way lately to let the markets know that they are probably going to lower the Unemployment Rate threshold used to trigger a change in monetary policy. Thus, the 7.0 percent level is no longer the line in the sand that it had been in the fall.
The Bottom Line
So... the bottom line is that the jobs report didn't appear strong enough to cause the Fed to taper the QE3 program in December. And yet, it wasn't weak enough to cause concern about the state of the economy. And THIS is why stocks rallied on Friday.
As such, it appears that Goldilocks is alive and well. Party on Wayne!
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Taper (aka Fed Policy)
2. The Outlook for Economic Growth
3. The State of the Bull Market
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Neutral
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Near-Term Support Zone(s) for S&P 500: 1780
- Near-Term Resistance Zone(s): 1805-1813
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator: Neutral
- Price Thrust Indicator: Moderately Positive
- Volume Thrust Indicator: Neutral
- Breadth Thrust Indicator: Moderately Positive
- Bull/Bear Volume Relationship: Moderately Positive
- Technical Health of 100 Industry Groups: Neutral
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- Overbought/Oversold Condition: The S&P 500 is Neutral from a short-term perspective and remains overbought from an intermediate-term point of view.
- Market Sentiment: Our primary sentiment model remains Negative .
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
Weekly State of the Market Model Reading: Positive
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
Thought For The Day...
"I knew if I didn't leave my bitterness and hatred behind, I'd still be in prison." -Nelson Mandela
Looking for Guidance in the Markets?
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Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
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Positions in stocks mentioned: none
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