The Week Ahead: Focus Shifts From Earnings To Jobs Report
Pinchas Cohen | Aug 01, 2022 03:09
- Nonfarm payrolls employment data could determine Fed's path to tightening.
- I am convinced the biggest two-day rally since the 1970s is a bear market rally or a bull trap.
- Below are my reasons.
- We experienced the biggest two-day rally following a Fed hike since the 1970s. Does that sound right after the second jumbo rate hike in a row?
- The Nasdaq Composite gained 12.3% in July in one of the best-performing months in the gauge's history. It is unjustified for that to happen simply because earnings weren't bad, especially given the numerous ongoing risks: the highest inflation over four decades, still mired by a supply crisis because of COVID, and the Russian war are triggering the fastest tightening in decades. Also, measuring market health by the previous quarter is like looking in a rear-view mirror. It took time for the Titanic to sink. It didn't happen all in one go. In the last market crash, in 2008, the Fed and the U.S. government had the space for quantitative easing. Moreover, the Fed raises interest rates when the economy grows too fast. Now, it's hiking as the economy is pulling back, and the Fed cannot use QE. So I wouldn't be surprised if we didn't see these market levels again for a long time, maybe decades.
- Yields have been dropping since mid-June, as investors have piled into safe-haven Treasuries.
Investors may shift their emphasis from earnings to data in the coming week. On Tuesday, I wrote, "With so many potential risks, it is difficult to forecast, but I suspect corporate earnings will have a more lasting effect than the U.S. Fed, as results could help investors decide whether companies can still thrive in the current economic climate or not."
The reason I expect a greater weight of the focus to shift to jobs data is that Federal Reserve Chair Jerome Powell based future hikes on data.
Nonfarm payrolls employment numbers are generally the most impactful data. Still, the following few employment reports could determine the path to higher interest rates after Powell said in Wednesday's press briefing that the central bank's September policy decision would depend on data. And jobs data is critical amid a debate about whether the U.S. economy is in a recession after last week's GDP report revealed the second consecutive quarter of negative growth. The White House insists that we're not in a recession, and the primary data they use to support their argument is a strong labor market. So, you can see how a lot rides on the NFPs.
Truthfully, I didn't expect stocks to rise as they did. As I wrote last Sunday, "So, except for Meta (NASDAQ:META), collective traders appear to say that the stock should keep going lower. Will earnings change that? In my opinion, unless earnings are much better than expected - not only better than low expectations, but if companies can demonstrate that they can grow profits despite spiking inflation and interest rates - Q2 earnings will not mark a bottom for these stocks. There will be short-term volatility before another leg down."
Earnings were not outstanding. Investors were thrilled companies didn't fall off a cliff. I failed to appreciate how easily bulls are lured back in. Still, I did say that I expect markets to be volatile. I also reiterated that there is no bottom yet. How do I know that? We only know there was a bottom after the fact. Therefore, last week's substantial advance is nothing more than a bear rally. The more complex the rally, the harder the fall.
Now, let's pay attention to a critical theme: interest rates. Powell warned the market that the bank would resume the sharpest hikes in a generation and added that the pace of rate increases would slow at some point, and that policy is not predetermined but data dependent. So, what would you take from that? As of now, jumps in rates continue, and somewhere down the line, they will slow down. Duh! Well, what did the market take away? The Fed is slowing its tightening! In my opinion, this is nothing short of scandalous. I don't remember a time when Wall Street ever told investors to stop buying because, let's face it, that's how they make money.
Get The App
Why I'm Still Convinced Bulls Are About To Get Whipsawed - Hard
Source: Investing.com
Ten-Year yields completed a head-and-shoulders top, targeting 1.93%. Yields drop as the difference between the price of the underlying bond and its payout shrinks due to rising demand. That almost always happens when investors lose faith in the economy and equities.
Moreover, when investors are willing to buy Treasuries forever, falling yields - when rates are aggressively rising - underscore the level of uncertainty. Finally, the inverted yield is steepening so much that two-year yields are rising, while 10-year yields are falling, as people neglect shorter-dated bonds in favor of a much longer capital commitment.
Finally, let's look at the best-performing index, the Nasdaq 100.
It's up 17.62% from its mid-June low, having found support by the 200-week moving average.
The peaks and troughs are still trending down. If and when the gauge establishes an ascending series of highs and lows, I will repeat my bearish position. If other indices confirm this reversal, I will make a bullish call. For now, however, we are still in both a bear market and a downturn. The price is now facing formidable resistance: the February and March lows, and the May highs. Therefore, I expect the price will not likely repeat the same rally as that of last week.
Disclaimer: I made the same prediction two weeks ago and was wrong. The index additionally has a falling trendline, which is also the top of its falling channel, reinforced by falling 100- and 50-week MAs, in case I'm wrong again this week.
The U.S. dollar fell for the third day and second week.
The dollar may still be developing a falling flag, and so far, it's supported by the June 15 high. If equities fall, the dollar will likely return to rally.
Gold extended the upside breakout of a small H&S bottom for the second week and an overall three-week straight jump. However, gold is still trending within a falling channel, and the 100-day MA is falling toward a bending 200 DMA after the 50 DMA cut through it, demonstrating a general breakdown of pricing.
Bitcoin rose for the second week, above the 200-week MA, but remained within the short-term rising channel within the long-term falling channel after completing a massive double top. Here is my long-term analysis since January.
Oil rose for the week but remained below a symmetrical triangle. If the price follows through the top's downtrend, falling through $93, it will have also completed a descending triangle, which is more bearish and has an implied target of $56.
Disclosure: The author currently does not own any of the securities mentioned in this article.
***
Interested in finding your next great idea? InvestingPro+ gives you the chance to screen through 135K+ stocks to find the fastest growing or most undervalued stocks in the world, with professional data, tools, and insights. Learn More »
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.