Unemployment Report Shocks Markets

David Fry's picture

 

The big driver of market declines Friday was led by the Non-Farm Payrolls report. The jobs data was a dreadful miss (88K vs 198K & prior 236K) and the unemployment rate declining from 7.6% from 7.7%. The unemployment rate is misleading since 663K people dropped from the labor force and now total 90 million. The labor force participation rate fell to 63.3% the lowest level since 1979.

This leads to the major “disconnect” we’ve been seeing between stock prices and overall economic data which we posted just last week. This is the nagging and confounding reality of the QE and ZIRP grand experiment for many investors.

Even the Bank of England announced per Bloomberg: Gains by equities since mid-2012 “in part reflected exceptionally accommodative monetary policies by many central banks, per the BOE’s Financial Policy Committee”

The chart below (courtesy of Zero Hedge) reflects European data and stock indices but could be easily applied to conditions in the U.S. and other countries engaged in QE.

Now we have the same distortion and disconnect with the Bank of Japan’s QE policy that closely mimics U.S. Fed policies. It is designed and intended to double the Japanese monetary base. There is no assurance the impact will improve economic conditions overall vs increasing stock prices. It’s all artificial but that’s what some investors, especially old timers, sense.

Earnings shouldn’t be great but due to ZIRP, many companies are finding it easy to sell debt and buy back shares. This reduces share float allowing for even weaker earnings to look better. With recent data poor, I’d expect most earnings reports to struggle some.

Stocks opened the day sharply lower with just about every sector taking heat. As the day wore on markets slowly recovered and then ramped higher by the 2:15 PM Buy Program Express that made the decline look more respectable. Who would be buying on this dreadful news? (Thinking….thinking….hmmm) Higher prices at day’s end were in previously underperforming transports (IYT), utilities (XLU) and banks(KBE). Losers included a wide assortment of issues including technology (XLK),small caps (IWM), healthcare (XLV), consumer durables (XLP) and materials (XLB). Overseas markets were weak in Europe (IEV), China (FXI) and Australia (EWA).

The dollar (UUP) was weaker even as there’s little to like in other fiat currencies. Gold (GLD) reversed course and rallied on weaker data, dollar and some fear. Commodity prices (DBC) were weak led lower by oil (USO) and copper (JJC). With stocks weak, bond (TIP) prices rallied. Late in the day Friday Consumer Credit for February was released with revolving credit up $532 million and Student and Auto Loans up $17.6 Billion—both the latter are in a bubble. This pushed stock
prices off the lows.

With hindsight “the tell” was the weekly DeMark 9 showing the potential top in the leading major U.S. sector, small caps as represented by IWM (iShares Russell 2000 Small Cap ETF).


In other news a Reuter’s employee, turned whistle blower, sues the company for wrongful dismissal after he alleges the company was leaking economic data early to High Frequency Traders (HFTs). Recently hired HFT lobbyist consultant Mary Schapiro now will have to use her influence which makes her recent hire beyond despicable. Also, government auto loan recipient, Fisker, declared bankruptcy. The government had funded $529 million to the company. Based on these and other recent stories, I’d say corruption is omnipresent in Washington these days.

Volume on this volatile Friday was higher again with selling while breadth per the WSJ was negative overall.


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 The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.


The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

 

Is it any mystery who the buyers were as the day wore on Friday? It was either those with positions to protect, dip buyers or the Fed. As to the latter, nothing should surprise as the beard is engaged in the great experiment.

An interesting item is today marked the 12th consecutive day of opposite market moves which has never happened previously I’m told.

Earnings season starts again beginning next week with Alcoa (AA) as usual the first of the majors to report. The economic calendar features Fed Minutes Wednesday, followed by Jobless Claims, Retail Sales and Consumer Sentiment.

Let’s see what happens.