WASHINGTON. The US stock market opened dismally Friday morning, following through on Thursday’s negative close. The alleged reason for today’s downdraft: February’s surprisingly low employment numbers, which found just 80,000 workers landing new jobs last month.
March, according to the poet, is supposed to come in like a lion. But, thus far, March 2019 has come in more like the Cowardly Lion in the Wizard of Oz. All week long, the punditocracy busied itself attributing this market’s dismal March performance to the still-inconclusive US-China trade negotiations. That may have contributed to the negative bias, while, happily for the MSM, also giving them an excuse to bash Trump.
Low employment numbers for February freak out traders and investors. But should they?
But today’s low employment numbers didn’t help. However, we note that most reports don’t pay any attention to how the long government shutdown and the
global warming climate change induced Polar Vortex might have gummed up the works in last month’s numbers. Sometimes low employment numbers in a given month are an anomaly when such cosmic forces are in play.
Like the Fed, the ECB admits “mistakes were made.” Sort of.
Low employment numbers aside, also unhelpful to the bulls, but in a sort of positive way longer term: The European central bank’s (ECB’s) decision to ease up on its ill-advised austerity program, likely for the rest of the year. They even plan to provide a bit of much-needed stimulus. This follows on the US Fed’s rethinking on the same issue.
CNBC provides some details on the ECB action, which surprised many investors.
“The ECB… said its new targeted longer-term refinancing operations (TLTRO-III) stimulus program will start in September and run through March 2021. TLTROs are loans provided by the ECB to European banks at a low rate, making it easier for them to lend money to consumers, which in turn can help stimulate the economy. This is the third stimulus injection from the ECB since 2014.”
In other words, the Euro-socialist elites have begun to figure out that once again, their feeble, anti-worker, anti-capitalist reflexes continue to constrain the Euro-economy, which remains, in technical terms, in a perpetual FUBAR state. That’s because, Germany aside, they always have low employment numbers, because their socialist economies don’t create work.
The US economy still remains (weakly) on track
Despite a generally positive market tone here (Q4 2018 excepted), the robust US economic recovery remains somewhat weak at its core. The country has only just begun restoring the bank accounts and the loss of wealth that nearly extinguished this country’s middle class during the misguided policies of the Obama Administration. Why nip this in the bud when there’s essentially zero inflation in the system. (Except maybe for grocery prices.)
For once, the Fed finally listened to President Trump (while never acknowledging that they did). At last they understood that they were setting the country up for a nasty recession for no reason. Disguising their admission by wrapping it in a thick blanket of Washingtonspeak, they suddenly, and correctly, quit applying the brakes to the US economy.
Our preliminary conclusion is that the Fed halted its interest rate overkill too late to head off an economic slowdown here. But they did it just in time to avoid a major recession. On the other hand, they are largely to blame for our current economic ennui, along with the overly cautious ECB, which has mired much of Europe in a persistent, mild recession for over a year, at least in our opinion.
Is Mr. Market just “digesting” 2019’s early rally? Or are those low employment numbers telling us something else?
On balance, however, most of this week’s downward pressure, including today’s, was more likely caused by the substantially overbought stock market itself. That’s intuitively obvious, given the fierce rally that dominated trading action in January and February. This powerful rally had pretty much erased the effects of last fall’s seriously nasty bear market.
Our dilemma right now is this: Was the 2019 rally but a brief pause in a still-ongoing bear market? Or is this week’s bearish action merely digesting investors’ massive gains over the last 60 days?
We prefer to follow the second line of inquiry. And we believe that this disturbing interval, too, will pass. This year’s big opening rally was fun. We hope to see it resume in a week or two. But right now, it’s time to digest 2019’s big initial up-leg in stocks. What that means (if we’re right) is that Mr. Market may take a week or two (or more) to get comfortable at higher levels before he resumes 2019’s exciting rally.
Who knows what the catalyst for the rally’s resumption might be? It could very well happen that some kind of China trade agreement might allow Mr. Market to engage in Round 2 of 2019’s irrational exuberance.
Moderately bad news from the VIX and the McClellan Oscillator
As for right now, we see little hope for another sharp rally, at least in the short term. That’s because the VIX, the market volatility measure, has begun to spike upward, indicating some chaos remains ahead, as Tom Bowley notes.
“The Volatility Index ($VIX, +6.78%) spiked on Wednesday and this index highlights the level of fear in the stock market. Rising fear = lower prices nearly every time. The VIX rose for the third consecutive session yesterday. While that might not seem like much, it’s the first time it’s happened in 2019. The VIX also closed above its 20 day EMA for the first time in 2019. I’m not going to predict a stock market rout because of these developments, but it’s clearly the bears’ first real technical damage inflicted this year. In order to stem the tide, the bulls will now need to reverse this rising trend in fear….”
Another problem: The McClellan Oscillator is still in the process of plummeting toward a bottom. And given the volume of negative trades, that’s likely to continue until it bottoms, triggering the next rally, as it almost always does. Pictured below, the chart depicting current action through Thursday afternoon’s market close tells the story.
The direction of this chart seems as if it’s already determined to challenge the December 2018 lows. Other charts and trading patterns seem to confirm this. But we expect a bounce before then, due to the changing market tone. Unless we get another tranche of low employment numbers in March.
In our portfolios: Exit two faltering preferreds, and Kroger. But adding more Amazon and Alibaba
At any rate, we’ve dumped a couple of suddenly dubious preferred stock holdings in our own portfolios, due to evidence of extremely poor corporate management. We also dumped a small position in grocery giant Kroger (trading symbol: KR). It got smooshed for a 12 percent loss Thursday after it reported horrible quarterly numbers for all the right reasons. We may get back in when the smoke clears.
But we’re doing limited buys of Amazon.com (trading symbol: AMZN) as that company keeps getting negative news jabs that cause the shares to hold back on the big rally they’re trying to undertake.
Ditto the highly volatile Chinese Amazon, Alibaba (BABA). Our position here got hurt somewhat this week due to the endless extensions in those Chinese trade negotiations. We may average down and pick up a bit more if the stock drops below our initial purchase price.
If the trade negotiations fail, this position fails as well. If we get a sudden happy announcement of success, however, these shares will blast off for the stratosphere, and we’ll be able to start looking at waterfront real estate in the Bahamas. Well, not really. But it’s always fun to dream.
— Headline image: Image via Pixabay.com. Public domain, CC 0.0 license.