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The Big Jobs Number and How to Trade It – Part II

In the first part of this research article, we attempting to highlight how the huge jobs number shocked the market into a big upside price move on Friday, June 5, 2020, and how the underlying data continues to suggest we have quite a bit of work to do before the US economy supports current stock market price levels.  In this second part of our research article, we’ll continue to share data and charts that we believe paint a very real picture for skilled technical traders.

The huge upside price rally in the US stock market after the 2.5 million jobs number was posted at 8:30 am pushed the stock market higher by 3.5%+.  This is an incredible rally in terms of how primed the stock market was for this type of great news.  Yet, as we continue to try to suggest, we are still moderately cautious of this rally in terms of sustainability after the destruction to the US and the global economy as a result of the COVID-19 virus event.

Our researchers believe the current numbers may be slightly skewed because of the extreme contraction event that took place over the past 60+ days.  Additionally, many of these numbers are calculated using a modeling system that attempts to normalize outlier data.  Currently, with the markets pushing well into a bullish territory and the NASDAQ reaching new all-time highs, we can’t argue that the US stock market appears to want to move higher on any news (good or bad).

Before you continue, be sure to opt-in to our free market trend signals 
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NASDAQ (NQ) E-MINI FUTURES DAILY

This NQ Daily chart highlights the incredible rally we’ve seen in the tech-heavy NASDAQ.  After recovering nearly 50% from the March lows, the NQ began to set up an upward sloping wedge formation near the middle of April.  This tightening wedge formation has apex’ed recently just as we got the new jobs number today.

In an unbelievable upside price rally, the NQ is now trading at the highest levels EVER.  After 38 million jobs lost, the US economy operating at only a fraction of what it was in January, huge consumer displacement factors, and thousands of pending solvency issues – hey, why not push the NASDAQ up to new all-time highs.  This makes no sense to us at the moment.

NAS100/GC DAILY RATIO CHART

The reality is that this incredible rally in the stock market may have already become a speculator “bubble” – a euphoric over-reaction to the deep decline related to the COVID-19 virus event.  Earnings and future revenues typically drive valuation growth higher.  Take a look at this NAS100 to Gold ratio chart to understand what has really happened in the markets over the past 4+ years.  The peak in values in October 2018 coincided with the US Fed action to raise interest rates which prompted a massive decline in the US stock markets throughout the end of 2018.  Near Christmas, 2018, the markets bottomed and began to rally higher.  Notice the peak in 2019 was not higher than the peak in 2018?  This suggests the real valuation peak in the market coincided with the peak Fed Funds Rate level in October 2018.

Additionally, the downward price channel that has setup in this ratio chart suggests the wild trending in the markets while Gold has pushed moderately higher has prompted a sideways pennant/flag formation.   The previous peak, in early 2020, and the current peak are well above the upper pennant level – this suggests an over-exaggeration of price advancement.  This type of ratio activity is very reminiscent of 2005 to 2007 – where the stock market rallied and gold rallied, eventually leading to the breakdown in the stock market in 2008-09 and a much deeper breakdown in this ratio.

US ISM NON-MANUFACTURING BUSINESS ACTIVITY INDEX

The current economic data does not support a US stock market rallying to new all-time highs – unless you attempt to account for investor over-enthusiasm and exuberance.  The business activity data over the past few months have shown the deepest decline over the past 20+ years.  There has never been a print of this indicator below 30, ever, except April 2020.  Even at the height of the 2008-09 housing/credit market crisis or the 911 terrorist attacks, US businesses continued to operate at moderate levels.

(Source: https://www.investing.com/economic-calendar/ism-non-manufacturing-business-activity-1484 )

US UNEMPLOYMENT RATE MONTHLY

The unemployment rates are still far higher than at any time in over 70+ years – everything is fine.  Why not push the stock market price levels higher by another 20 to 25% – right?  These people will eventually find work somewhere – sometime??  The consumers will eventually re-engage in the economy and push income and revenue levels higher – but not right now.

(Source: https://www.investing.com/economic-calendar/unemployment-rate-300 )

US ISM MANUFACTURING INDEX MONTHLY

The ISM Manufacturing Index suggests manufacturers are operating 25 to 45% or below capacity levels from early January/February 2020.  This will translate into bottom-line revenue data in the near future and likely result in much lower forward earnings guidance.

(Source: https://www.investing.com/economic-calendar/ism-manufacturing-pmi-173 )

Our continued warnings may go unheeded by the masses – and maybe we are wrong.  Yet we continue to advise our clients to be very cautious of this upside price rally as we believe the technical factors driving this market are skewed.  Speculators and investors are caught up in an elated buying phase when real data suggests more moderate price valuations.  We are still very concerned about the risks of a breakdown in the markets related to a sudden shift in trader/speculator thinking.

Very similar to the enthusiasm of 2006 to 2008, traders can sometimes fall into a trap that expectations do not correlate with real data/technicals – and this can be dangerous.  If you play these upside moves very cautiously and target the best asset for your investment objectives, you can do very well while this rally pushes higher.  Yet, you also have to be very aware of the risks of a breakdown in price related to the tightening economic conditions and price channels.

YM – DOW JONES E-MINI FUTURES 30 MINUTE CHART

This YM 30-minute chart highlights the incredible rally that took place very early in trading on June 5, 2020 – just after the jobs number hit.  The traders and speculators want anything that seems positive after months of uncertainty related to the COVID-19 virus event.  This bias towards anything positive suggests traders will attempt to push price levels into a feeding frenzy – ignoring all risks and other data.  No Fear is an excellent description of what is happening right now in the US stock market – traders have absolutely no fear of any downside risks.  We’ve seen this before – and it usually ends badly for some people (remember the DOT COM rally?).

CONCLUDING THOUGHTS

Our opinion is that traders should stay moderately cautious near these current levels.  Even though it appears the markets can do nothing wrong and speculators will likely be telling you “this is the opportunity of a lifetime – just buy anything right now”, our experience is that these types of crazy, euphoric rallies are very dangerous.  Price breakdowns come fast and hard in markets like this – they happen quickly.

Cover your open long trades with moderate stop levels.  Be picky about what you invest in and target quick gains.  Remember the market can act irrationally much longer than many people can stay whole.  The shorts are under severe pressure right now, but the data is pointing to a very different outcome in our opinion.  We urge you to stay cautious right now – this seems very similar to the exuberance that we saw in 2006-2008 – just before it all fell apart.

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles in stocks and commodities. I believe I have a good pulse on the market and timing key turning points for investing and short-term swing traders. 2020 is an incredible year for traders and investors.  Don’t miss all the incredible trends and trade setups.

Subscribers of my Active ETF Swing Trading Newsletter had our trading accounts close at a new high watermark. We not only exited the equities market as it started to roll over in February, but we profited from the sell-off in a very controlled way with TLT bonds for a 20% gain, and we closed out another winning trade on Friday.

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

Surprise Jobs Number and What It Means For Your Positions

The Huge Non-Farm Payroll number released on Friday, June 5th, shocked the market.  A massive 2.5 million jobs were created in May 2020.  If you were paying attention to the data, you’ll also understand that 1.87 million new jobless claims just last week.  In fact, over the month of May 2020, a total of 12.58 million jobless claims were filed.  Taken into consideration, the new jobs created in May represent less than 20% of the total job losses over the same span of time.

Our researchers believe the jobs number is representative of a phased reopening of many US states and correlates directly with the extended opportunity for further re-engagement of the US economy over time.  The current social unrest taking place throughout the US will likely result in a new spike in COVID-19 cases as well as extended losses for certain businesses.

The rioting seems to be taking place in more populated states right now – which suggests some real concerns for many of these states in regards to scheduled reopening phases and the potential for a spike in COVID-19 cases.

Before you continue, be sure to opt-in to our free market trend signals 
before closing this page, so you don’t miss our next special report!

US MAP – STATES REOPENING STATUS

As you can see from the US map, below, the number of states that have started to reopen over the past 30+ days exceeds the number of states still shutdown or partially open.  Our researchers believe the migration of the protesters from state to state as well as the continued unrest throughout the US may prompt a new spike in COVID-19 cases – particularly within states that have had the highest transmission rates and are more populated than other states.

Source: https://www.nytimes.com

US NON-FARM PAYROLL MONTHLY

The May 2020 Non-Farm Payroll number is a welcome positive surge after many months of negative data.  Still, as we suggested near the start of this article, the 2.5 million new jobs created did not offset the 12.58 million jobs lost in May 2020.  Anyone capable of doing simple accounting can figure out that we need to see more continued new job creation levels to begin to offset the massive layoffs and job losses as a result of the COVID-19 shutdown event.

The US Stock market is hungry for any positive news right now, so the markets look at this data as a very positive sign that a recovery will happen and could be a stupendous opportunity for future growth.  Our researchers are still very cautious about this recovery simply because the underlying data is still very negative overall.

Source: https://www.investing.com

US JOBLESS CLAIMS – WEEKLY

As you can see from this Weekly Jobless Claims chart, below, the spike in new jobless claims happened in early April 2020 with 6.86 million new jobless.  Since then, the number of new jobless has continued at levels greater than 2 million per week and have slowly been decreasing.  We are aware that many states are reducing state and educational employment budgets as a result of the COVID-19 virus event.  These budget cuts and layoffs may continue throughout all of 2020 and into 2021 unless a strong recovery event takes place before the end of 2020.

State budgets and the continued risks of a COVID-19 case spike present very real concerns in the minds of our researchers as we have just begun the initial reopening phases for many states.  If our presumptions are correct, the social unrest and rioting may prompt a major spike in COVID-19 cases across many states and present a very real extended shutdown event that could last well into late-Summer.

Source: https://www.investing.com

PUT/CALL RATIO – DAILY

This next chart suggests there is “No Fear” in the markets right now as investors pile into the long trades.  This Put/Call ratio chart highlights one simple fact that the market can stay irrational for much longer than many traders can handle.

The Fed intrusion into the markets on March 20, 2020, created a bullish foundation in the markets.  Traders have piled into this bullish trend over the past 45+ days and this Put/Call chart highlights how extended the rally has gotten recently.  Normally, the extremely low levels on the Put/Call chart would suggest a massive market top setup is about to happen – yet, traders may push the markets further into an irrational bullish phase with their exuberance.

We put together a short yet detailed video that will open your eyes to what the market data and charts are pointing to. If you are short the market of having FOMO (Fear Of Missing Out) on this rally be sure to click and watch this video right after you finish this article.

CONCLUDING THOUGHTS:

The reason we stay cautiously related to this bullish price trend in the US stock market is that we believe technical patterns have already set up that suggest a downward price cycle must complete before the bottom in the markets is settled.  In Part II of this article, we’ll go over additional charts and data to help you plan for and prepare for the next big move in the markets.

If the markets are able to push much higher after today’s big jobs number, we urge all long/bullish traders to lock in gains with protective stops and to adopt a very cautious outlook going forward.  It appears the markets have over-extended this rally and we are still very concerned that a sudden breakdown in price will happen.

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles in stocks and commodities. I believe I have a good pulse on the market and timing key turning points for investing and short-term swing traders. 2020 is an incredible year for traders and investors.  Don’t miss all the incredible trends and trade setups.

Subscribers of my Active ETF Swing Trading Newsletter had our trading accounts close at a new high watermark. We not only exited the equities market as it started to roll over in February, but we profited from the sell-off in a very controlled way with TLT bonds for a 20% gain. This week we closed out SPY ETF trade taking advantage of this bounce and entered a new trade with our account is at another all-time high value.

Ride my coattails as I navigate these financial markets and build wealth while others watch most of their retirement funds drop another 35-65% during the rest of this financial crisis going into late 2020 and early 2021.

Just think of this for a minute. While most of us have active trading accounts, what is even more important are our long-term investment and retirement accounts. Why? Because they are, in most cases, our largest store of wealth other than our homes, and if they are not protected during the next bear market, you could lose 25-50% or more of your net worth. The good news is we can preserve and even grow our long term capital when things get ugly like they are now and ill show you how. One of the best trades is one your financial advisor will never let you do because they do not make money from the trade/position but we do have a way for you or your advisor can take advantage of the market gyrations with our Technical Wealth Advisor investing signals.

If you have any type of retirement account and are looking for signals when to own equities, bonds, or cash, be sure to become a member of my Passive Long-Term ETF Investing Signals which we issued a new signal for subscribers.

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.