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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, May 07, 2020

1. Indexes rise ahead of Nonfarm Payroll report

2. Why bond ETFs are rising

3. Jobs numbers may not sink the Dollar

Market Moves

Not only did the U.S. stock market indexes close solidly higher today, but U.S. Treasury bonds did as well. The unusual mix of results has to do with some unusual circumstances ahead of the Nonfarm Payroll report. The report is scheduled to be released before the market opens tomorrow and investors are anticipating bad news. Analysts are forecasting that over 21 million jobs will be counted as lost during the month of April. This is more than thirty times worse than the result from March, which was the worst month on record to that point.

And yet, if everyone is expecting bad news, why did both the stock and bond market rise today? In the case of stocks, it has to do with the idea that the market is behaving as if it expects the economy to recover rather quickly. Investors may be wrong about that, but it is hard to argue that investors are making their expectations openly known.

The chart below displays how today's price action has continued an upward trend in the stock indexes with the Nasdaq Composite (IXIC) being the second index to move above its starting point for 2020. The Nasdaq 100 (NDX) had previously done so and the S&P 500 index (SPX) as well as the Russell 2000 index (RUT) have yet to regain their former levels.

Considering this trend and the results of today's session, it appears that investors were interested in buying up both bonds and stocks today. This can only suggest that while everyone expects bad news from the Nonfarm Payroll report tomorrow, nearly no one expects the report to cause panic. Since the bad news is already anticipated, it is likely priced in to the current index levels. The explanation for bonds, however, is a bit more unusual.

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Why Bond ETFs are Rising

The daily performance of the iShares 20+ Year Treasury Bond ETF (TLT) improved its price by 1.67% today, simultaneously driving interest rates lower. The reason for why this occurred did not have anything to do with a change in Fed policies. Instead it had to do with the stated intentions of the Fed to actually buy bond index ETFs.

Investors recently got more information about how the Fed will carry out its plan. As the Fed explained their program parameters, they seemed to tip their hand about what they will be buying and by doing so revealed that they hadn't actually begun yet. So today investors took the opportunity to buy in ahead of the Fed. Seems like a a logical response by investors. However, it is worth pointing out that, oddly enough, the Fed is getting investors to accomplish their goal (propping up bond ETF prices) without even spending any money just yet.

It will be interesting to see whether this clever tactic will remain viable. As the chart below displays that volatility is on the rise in TLT shares.

Square Stock in Rally Mode Despite Losing Quarter

Trading the Non-Farm Payroll Report

Jobs Numbers may not Sink the Dollar

The chart below shows that the timing of the Nonfarm Payroll report will occur at a critical moment for Forex traders. It shows a Fibonacci time sequence indication overlaid on the EUR/USD currency pair. The most recent time frame implies the possibility of a time-based pivot point occurring at a support level.

This implies that investors and traders may react strongly to the report tomorrow. If investors find the news worse than expected, the price of this pair should likely rise significantly above 1.1 in value. If the news is somehow better than expected, the news could send the price of this pair dramatically through support.

The Bottom Line

Stock and bond indexes both closed higher because investors think the bad news from tomorrow's Nonfarm Payroll report is already priced in, and bond investors are trying to get ahead of the Fed's program to buy bond ETFs. This may cause unexpected volatility in the forex, bond and stock markets tomorrow.