foxex: Jobs Plunge

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Chart Advisor | Focus on the Price

By James Chen, CMT

Friday, April 03, 2020

1. Markets Retreat as Job Numbers Plunge

2. Volatility Eases Even as Markets Decline

3. Oil Gains: A Drop in the Bucket?

Market Moves

On Friday, the U.S. Labor Department released the worst monthly jobs number since the financial crisis of 2008-2009. In March, non-farm payrolls saw a devastating loss of 701,000 jobs, seven times the decline that was expected by economists. Besides being in the ballpark of the worst of the financial crisis, March's job loss was the first decline in non-farm payrolls since 2010. Driven by a massive and ongoing shift in business and the economy as a result of the global coronavirus pandemic, the sharp plunge in job creation was accompanied by a worse-than-expected overall unemployment rate of 4.4%, up from 3.5% in February. This news follows a record spike in weekly jobless claims released a day earlier.

U.S. equity markets initially seemed to take the news somewhat in stride, especially since crude oil prices continued to rally strongly for a second day (more about oil below). But as Friday wore on, markets soon succumbed to the highly disappointing employment numbers and what it indicates about the state of the U.S. economy. Though markets attempted to stage a late-day bounce, the major large-cap indexes ended Friday well over 1% in the red.

The chart below of the S&P 500 (SPX) provides a picture of where we are now. From the February all-time high, the S&P 500 has lost more than 26%, which puts the market well within bear market territory. Along the way, the index has formed a technical "death cross" (when the 50-day moving average crosses below the 200-day moving average), an ominous sign for technical analysts that there may well be more pain to come. Though we saw the beginnings of a V-shaped recovery from the March 23rd low below 2200, that rebound sputtered this week and the market now appears to be in a volatile consolidation pattern. Whether this is just a pullback in a broader recovery or the start of yet a new leg down remains to be seen. We're taking it one day at a time.

Volatility Eases Even as Markets Decline

On a slightly brighter note, a few gauges of investor sentiment have begun to show signs of calming down. During normal periods of low-to-moderate volatility, an S&P 500 drop of 1.5%, like what happened on Friday, would be considered a relatively hefty decline. Nowadays, though, it's par for the course, and can even be considered mild. Investors have become more jaded. So there was little surprise that even despite Friday's market drop, the VIX (or the "fear gauge"), which is a key measure of the market's expectation of volatility and risk, declined a full 8% through the course of the day (typically, but not always, the S&P 500 and VIX move in opposite directions). This is one potential sign that the market panic may be in the process of abating, at least for now. The VIX chart below shows the index falling sharply from its March 18th peak, even as the equity markets have continued to move in a highly volatile manner.

Likewise, Cboe's put/call ratio has also been on the decline, hinting at declining fears of further market downside. The put/call ratio is an indicator that provides information about relative trading volumes of the S&P 500's put options to its call options. A larger proportion of puts to calls (a higher ratio) tends to indicate bearish sentiment, and vice versa. A ratio of 1.00 would indicate an equal volume of puts to calls. As shown on the chart below, the ratio hit a peak above 1.80 in early March when market troubles were escalating sharply. Since then, though, the ratio has come back down sharply to approach the 1.00 level once again, providing some indication that investors are becoming less fearful.

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Oil Gains: A Drop in the Bucket?

The sharp decline in oil prices has been at the forefront of investor sentiment along with other economic implications resulting in large part from the spread of the coronavirus pandemic. The past two trading days, however, saw a sharp rise in the price of crude after President Trump told CNBC that he expected Russia and Saudi Arabia to announce a deal to cut oil production substantially. Russian President Vladimir Putin reportedly acknowledged as much on Friday, but said that the U.S. must also cut production.

As shown on the chart below, after hitting a low below 20 in late March, crude oil futures jumped a whopping 24% on Thursday and then another 13% on Friday. This constituted a combined spike of over 40% in the span of two days. While this may indeed seem like a massive surge, the price of crude oil is still well below 30 and much less than half the price it was at the beginning of the year. Will production cuts (that may be conditional upon U.S. participation) be enough to alleviate the downward price pressure from plunging demand? Maybe, if an agreement among oil-producing nations can actually be made, but it will likely be quite a long time before crude prices will be able to regain previous levels.

The Bottom Line

Friday's U.S. employment report painted a bleak picture as to just how badly the coronavirus pandemic continues to impact the U.S economy. And more economic reports in the weeks ahead will likely exacerbate the economic outlook. Despite what seems like an ongoing barrage of bad news, however, market volatility has been falling rather consistently in recent days and weeks, giving some hope that investor sentiment may be on the mend.