foxex: The Bearishness Could Have Been Much Worse

Chart Advisor | Focus on the Price

Friday, March 08, 2019

1. Disappointing jobs numbers trigger knee-jerk selling

2. S&P 500 completes double top but holds at higher low

3. Discretionary stocks outperforming staples stocks

Major Moves

The Bureau of Labor Statistics (BLS) had been delivering bullish news for the past 16 months, and most analysts and traders believed it was going to do so again today. Unfortunately for those optimistic traders who were looking for more bullish economic news, the BLS delivered a sucker punch to the gut instead.

The BLS reported that the U.S. economy created a measly 20,000 new jobs during February. I say measly because the consensus estimate was looking for 180,000 new jobs to be created, and most analysts look at the 200,000 new jobs level as the threshold between strong jobs growth and weak jobs growth.

As you can imagine, traders weren't happy at all when this news was released before the opening bell. Traders sent stocks lower in pre-market trading, and the major indexes all gapped lower.

Here's the interesting thing though. None of the major indexes have continued falling.

After their initial knee-jerk response to start selling stocks after receiving bad economic news, traders quickly started buying again and stabilized the market. They reminded themselves that reacting to a single economic announcement is counterproductive.

Big economic beats or misses make for great headlines, but they make for lousy long-term trading guides because they can be so volatile.

All you have to do is look back on the nonfarm payrolls numbers the BLS has reported over the past few years to see just how quickly one month's numbers can tank, only to be followed by extremely strong numbers the next month.

In May 2016, the U.S. economy created ~15,000 new jobs. This could have been a worrisome number, except for the fact that the economy created ~282,000 new jobs the next month.

We saw the same thing in September and October 2017. The economy created ~18,000 new jobs in September and then went on to create ~260,000 new jobs in October.

Knowing that this pattern exists, we have to wonder how many jobs the economy might create in March after creating only 20,000 in February. It's possible we might see another 200,000+ jobs number next month. If that is the case, we don't need to worry about the low number this month.

Of course, just because a pattern exists in the past doesn't guarantee it is going to carry on into the future. If the jobs numbers for March look as bleak as they did for February, we have to start wondering if a new trend is being established, rather than a volatile blip among otherwise healthy numbers.

We'll cross that bridge when we get to it. For now, today's jobs miss by itself is nothing to hang your bearish hat on.

S&P 500

It was a bearish week for the S&P 500, but it could have been worse.

The index completed a double top bearish reversal pattern on Thursday when it dropped down through the slightly up-trending support level it had been interacting with. Based on the height of the consolidation range that formed the body of the reversal pattern, the double top gives us a downside price target of ~2,700.

However, by holding its ground today after the initial shock of the disappointing nonfarm payrolls number, the S&P 500 was able to stay above this bearish price target and maintain the multi-month uptrend it has been in by establishing another higher low.

The low that was established today as the index recovered will need to be confirmed by another bullish day on Monday, but today's candlestick looks promising.

If we broaden our scope just a little, the S&P 500 is still firmly consolidating between longer-term support at 2,630 and longer-term resistance at 2,800. This tells us that while we may have seen a little profit taking this week, we're not experiencing any type of panic selling that we need to be concerned about heading into the weekend.

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Risk Indicators - TNX

The S&P 500 wasn't the only indicator moving lower this week. The 10-Year Treasury Yield (TNX) also pulled back from the short-term high it had established to close at 2.63% – its lowest level since plunging to close at 2.55% on January 3.

Depending on how you draw your support level, you could make the argument that the TNX has now completed a bearish triangle continuation pattern and is destined to continue dropping lower (as you can see in the chart below), but I think it is premature to make that call.

Today's bearish candlestick – a spinning-top doji – is far from convincing as a sign of extreme bearishness. Spinning-top dojis typically appear during moments of market uncertainty.

I wouldn't be surprised to see the TNX continue to consolidate within the same 0.2% range it has been in for most of 2019.

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Bottom line: Labor Still an Unknown Risk

While I wouldn't be surprised to see the TNX hold at support next week, if it does continue to break lower, watch out for more bearishness in the stock market as well.

These two indicators tend to move in the same direction, and while we did see a divergence in their performance a few weeks ago, that divergence seems to have played itself out and the positive correlation has returned.

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