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S&P 500 Bulls Meet Nonfarm Payrolls

By Sunshine Profits (Monica Kingsley)Stock MarketsAug 07, 2020 10:42AM ET
www.investing.com/analysis/sp-500-bulls-meet-nonfarm-payrolls-200533342
S&P 500 Bulls Meet Nonfarm Payrolls
By Sunshine Profits (Monica Kingsley)   |  Aug 07, 2020 10:42AM ET
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The mid-February bearish gap has been closed, and the S&P 500 is getting ever closer to the February all-time highs. The outlook for markets on my radar screen is shining quite brightly, too. So, what stands in the way of overcoming those February highs?

The jobs data don't paint an entirely positive picture. Wednesday's ADP nonfarm employment change fell way short of expectations, and stocks shook it off. Yesterday's new and continuing unemployment claims showed improvement, and stocks dutifully rallied.

Which way will the effect of today's nonfarm payrolls go?

Nonfarm payrolls disappointed. But this isn't about trading any number, and stocks might take a cue from their performance Wednesday. Despite the encouraging look of the weekly chart (white candle on volume that
is likely to surpass preceding last week's candle once today's closing bell rings), the bulls better remember about risk management and be ready for the scenario of a noticeable upper knot appearing on the weekly candle.

The following big picture view holds true also today. The jobs data will underscore:

… the pain the real economy feels and its tenuous path to recovery. No knee-jerk reaction (…) means the markets aren't willing to take that seriously just yet. (Are they betting this soft patch would be gone?)

With U.S.-China tensions on the back burner, stimulus takes the spotlight – with a flare up in earnest between the frenemies (think trade deal phase one) being the wildcard (distant black swan). After a two-week window of the Fed expanding its balance sheet, the central bank tightened again as the data for the final July week show.

So, will the stimulus with its bone of contention in the form of federal $200 or $600 addition to unemployment claims be a buy-the-rumor-sell-the-news moment? In my opinion, the markets are more likely to welcome it than to sell off in its wake.

But let's deal with stocks first, and check their market pulse.

S&P 500 In The Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

There is no debating the breakout above the early June highs, and the volume examination keeps favoring the bulls. The respectable volume with little intraday volatility is an ally of upcoming higher prices.

Yes, the daily indicators are increasingly extended, and it's not about the RSI merely. A breather that would coincide with temporarily lower prices, would be both refreshing and healthy for another upleg.

So, we have these days' bullish price action and extended daily indicators as prices are approaching the February highs against the stimulus negotiations that are dragging on, and many a real economy sector's pain out in the open.

Should a correction strike, and take out the bulls such as myself again profitably out of the open position, it's imperative to assess the downswing's internals, whether it is or isn't turning into something more serious and not merely temporary.

Let's check the credit markets next.

The Credit Markets’ Point of View

High-yield corporate bonds (HYG ETF (NYSE:HYG)) rose again, and this time more noticeably than on Wednesday. The volume moved down more though, which could mark a short-term indecision ahead.

Regarding these two ratios, my credit market observations from Wednesday are still relevant today:

What a great sight as both leading credit market ratios – high-yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) – are supporting each other's upswings. One day the former has the baton. The next day, the other leads. The direction is clear, enabling higher stock prices.

The overlaid S&P 500 closing prices (black line) is increasing its relative distance from the HYG:SHY ratio. Stocks indeed seem more than willing to lead, thus sending a message of the bull run having still a way to go.

Leading up to the gold part of today's analysis, let's recall the below notes about this stock bull run:

So far, the propping efforts to bridge the mini-depression are working. The recovery off the March lows has been among the strongest ones when looking at all the WWII stock market rebounds that have made it past the 61.8% Fibonacci retracement. We're still in the "everyone benefits and no one pays" stages of inflation. The canaries in the coal mine flashing danger (hey, this can't last forever) are gold and the dollar.

Calling Out Gold

The daily gold chart reveals daily rising prices with Swiss clockwork precision since mid-July. The key question is how sustainable is the move that brought the yellow metal both above the 2011 all-time highs above $1,920, and breached the $2,000 handle.

It's beyond obvious that the daily indicators are heavily extended. The bulls are still able to reach out for new highs practically on a daily basis – but it's the upper shadows of recent candles that raises the odds of the bears interfering with the bullish ride.

The yellow metal is the strongest performing part in the precious metals arena – while silver is catching up mightily (thus bringing the gold-to-silver ratio back to its 2016-2018 range), it's nowhere near its own all-time highs, and neither are the gold miners.

Let's check the dollar. How does the anti-gold's performance look like?

The greenback has been plunging to new 2020 lows for many weeks recently. Since spring, I have been calling for the dollar to roll over.

Yes, I think that the great discounted entry opportunity is behind us. But that doesn't mean gold won't move lower. Barring a true liquidity crunch with a black swan accompanied by a steeply rising USDX, such downswing wouldn't get too far (as in plenty of hundreds of dollars) in my opinion.

The dollar chart shows there is a potential for the dollar bulls to come alive to a certain degree, though. In the current environment of indiscriminate money printing as far as the eye can see (the corona hockey stick is first of its kind, putting QE1 to shame), how far would the dollar make it?

Regardless of any precise number, that would likely usher in a soft patch in gold. Correlation of gold to the greenback changes over time, both in its strength and in its
direction, making it worthwhile to zoom out and connect the dots. That's exactly what the following chart with its exhaustive caption does:

The Q2 and Q3 2018 bear in gold was vicious, coinciding with Fed hiking rates. The tightening policy (yes, those distant days of shrinking Fed balance sheet) was being increasingly called into question, and the December 2018 FOMC was the last hooray of the hawks.

As you can see, the gold market called the bluff earlier, and as the central bank turned rather neutral, the yellow metal posture was turning increasingly bullish in late spring 2019. Both gold and the dollar were rising at the same time over the summer. The next key event was the repo market turmoil in autumn 2019, and it saw gold declining as the Fed injected liquidity. The can was kicked further down the road.

The real economy seemed strong, yet deteriorating credit markets against new S&P 500 highs in February 2020 showed that appearances can be deceiving. Gold welcomed the uncertainty, and after overcoming its March selloff, it reacted to Fed balance sheet expansions and very unorthodox monetary policy almost as much as it did back in the 1970s when money aggregates mattered more than in our MMT era.

The key thing, though, is that since the August 2018 bottom, gold amplified each setback the dollar met. The current pace of advance shows just how much it anticipates the inflation in the pipeline to hit. And that's precisely what makes it vulnerable in the very short-term.

What I miss though, is a credible catalyst to bring it down considerably. My June 22 expectations of its bright future are still valid, and I expect the yellow metal to move to new highs sooner rather than later. Yes, I look for any potential selloff to be brief and shallow, retracing a mere portion of this summer's gains. Consider yourself blessed if it reaches beyond these levels.

Summary

Summing up, the S&P 500 upswing goes on with the full support of the credit markets. As technology assumed the sectoral rotation leadership, the S&P 500 market breadth deteriorated – but both the small caps and emerging markets are largely standing their ground. The bulls remain well positioned to overcome the incoming jobs market data trepidations, and welcome the stimulus cheerfully.

S&P 500 Bulls Meet Nonfarm Payrolls
 

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S&P 500 Bulls Meet Nonfarm Payrolls

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Comments (12)
George Pichurov
George Pichurov Aug 09, 2020 12:03AM ET
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doesn't it get ugly for tech https://invst.ly/rqf25 ? Although I could count on nasdaq reaching 1.618 retrace which is some 5% above. Looking AAPL is even more scary to justify a buy https://invst.ly/rqf3n. But stimulus is everything, I know. Fed will buy stonks next week, and the week after it will start buying  groceries to boost the economy.
George Pichurov
George Pichurov Aug 09, 2020 12:03AM ET
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By 1.618 retrace I mean that https://invst.ly/rqf4b. Which is proper index to measure Nasdaq btw? I used QQQ, but there are so many.
Monica Kingsley
Monica Kingsley Aug 09, 2020 12:03AM ET
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George Pichurov  I mostly look at $COMPQ
Fred The Man
Fred The Man Aug 08, 2020 9:52PM ET
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Monica, what do you think of Friday's bearish engulfing daily candle at ATH on investment grade corporate bonds?
Monica Kingsley
Monica Kingsley Aug 08, 2020 9:52PM ET
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Thank you for the question. Looking at the candle, I don't think it marks any kind of reversal. The trend in LQD remains up
Monica Kingsley
Monica Kingsley Aug 08, 2020 10:17AM ET
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Enjoy your weekend, everyone!
Randall Wagner
Randall Wagner Aug 08, 2020 9:40AM ET
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Monica when a correction does surface, what is your estimation of the range of the % drop magnitude?
Monica Kingsley
Monica Kingsley Aug 08, 2020 9:40AM ET
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Hi Randall, the bigger question for me would be whether I would want to place a bet on it, or not. Best to be assessed on the spot, real-time.
Randall Wagner
Randall Wagner Aug 08, 2020 9:40AM ET
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Monica Kingsley thank you MK
Monica Kingsley
Monica Kingsley Aug 08, 2020 9:40AM ET
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Randall Wagner  Welcome, just keep on asking, everyone. Monday's analysis will dig into the tenuous nature of Friday's upswing.
Kaveh Sun
Kaveh Sun Aug 08, 2020 1:49AM ET
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I bought puts today because fiscal stimulus.
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Easy Trade
Easy Trade Aug 08, 2020 1:49AM ET
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Monica Kingsley  Everyone knows stimulus is coming, it's just a matter of when. The market really isn't worried, and mostly money for struggling people anyways, and those people have little effect on the market. There's still plenty of firepower left for stocks and bonds.
Robert DZ the patterns
Robert DZ the patterns Aug 08, 2020 1:49AM ET
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I see quite a few comments in this article and other articles where people say they bought puts. I hope it works out well either on Monday 10th or Tuesday 11th because I bought puts as well.
Robert DZ the patterns
Robert DZ the patterns Aug 08, 2020 1:49AM ET
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I wouldn't count on any significant drop though, around 2% only and then next leg up like most articles suggest.
Monica Kingsley
Monica Kingsley Aug 08, 2020 1:49AM ET
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Easy Trade  and Robert DZ: Of course, it's a matter of both the actual shape and when. Trump executive orders just in. You're interpreting quite correctly my reluctance of getting onboard the deep correction theme - the bull is alive and kicking though I acknowledge the very low put/call ratio
George Pichurov
George Pichurov Aug 08, 2020 1:49AM ET
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Easy Trade  those people have effect on consumption, which is 70% of US economy.
Gary Friauf
Gary Friauf Aug 07, 2020 11:07PM ET
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I believe the dollar has formed a bottom and will start climbing into next week which in turn drives the market down. My game plan started today with short futures positions in both the S&P and Russell. Sunday night I'm going short the EUR/USD in anticipation of a dollar move higher in the near future.
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Kevin McCarthy
Kevin McCarthy Aug 07, 2020 11:07PM ET
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im of the mind, the dollar keeps going down for the month and starts a rebound next month. little bit of sideways action around 88-85 on the dollar index. plenty of room to still drop. this is assuming the EU and China don't try to match our stimulus until next month.
Gary Friauf
Gary Friauf Aug 07, 2020 11:07PM ET
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Enjoyed the article Monica!!
Monica Kingsley
Monica Kingsley Aug 07, 2020 11:07PM ET
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Gary Friauf  Thank you very much! You mean also the gold section? This question goes out to those who wanted to see that featured - did it strike the balance of big picture view and short-term outlook that you sought? Your answer will help me to grant your wishes next time, whatever the market of your interest
Gary Friauf
Gary Friauf Aug 07, 2020 11:07PM ET
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I thought the article was thorough throughout. You brought up many key points effecting the market.
Monica Kingsley
Monica Kingsley Aug 07, 2020 11:07PM ET
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Gary Friauf  Thank you.
Kapil Baldawa
Kapil Baldawa Aug 07, 2020 9:38PM ET
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Don't you think mkt not reacting to negative news n going up in straight line irrespective of negative news leaves it vulnerable? what about fundamentals n valuation? do you think MSFT, APPL n AMZN can trade at these levels forever?
Monica Kingsley
Monica Kingsley Aug 07, 2020 9:38PM ET
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I have quite a few times recently said that the bulls better have gains locked in while letting them grow. And the tech giants will trade even higher then they do now - their charts aren't really bearish
George Pichurov
George Pichurov Aug 07, 2020 9:38PM ET
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Monica Kingsley  of course not. They are so one way bullish https://invst.ly/rqf3n
Tom Pym
Tom Pym Aug 07, 2020 7:18PM ET
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I think round number magnetism will get us to 3400 alone.
Monica Kingsley
Monica Kingsley Aug 07, 2020 7:18PM ET
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Prices definitely have a tendency to test supports and resistances - and the Feb highs fit that perfectly. Meanwhile the stimulus keeps dragging on, and second wave of unemployment looms
Tom Pym
Tom Pym Aug 07, 2020 7:18PM ET
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Monica Kingsley  I honestly don't think the second wave of unemployment will be anywhere near as bad as people think it will be.  So far this entire pandemic and market crash has mostly been overhyped.  It's serious yes, and deserves our utmost attention but covid cases seem to be naturally declining on their own.  More and more research is coming out showing that a large portion of the population may already have some immunity to it.  Evidence has shown the virus has already evolved to be more virulent which usually means it became less deadly as viruses tend to do.  Unemployment numbers have been better than expected save for the preceding two weeks.  Most of the uptick in unemployment from states rolling back or pausing reopenings have in my opinion already played out.  It's been two weeks since California shut down indoor businesses for instance.  Anyone needing to file unemployment there due to that probably already have.
Monica Kingsley
Monica Kingsley Aug 07, 2020 4:06PM ET
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For the record, please see my original version that didn't say "Nonfarm payrolls disappointed." but "Fundamentally, I look for the figures to rather disappoint in the big scheme of things."
Bhaskar Mahyavanshi
Trader2020 Aug 07, 2020 1:09PM ET
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"the S&P 500 market breadth deteriorated" shall we consider this as an early sign of sell off?
Monica Kingsley
Monica Kingsley Aug 07, 2020 1:09PM ET
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Not yet. It's true that the daily advance-decline line's yesterday closing values moved to negative territory, but today it's rising despite the daily doji so far. I use this indicator in a very dynamic way, and see it rather as indication room for growth. The weekly one is still positive, leaning slightly to the bullish side. But it's all the other points cited that make a case for the rally to go on as more likely than not
Andrew carson
Andrew carson Aug 07, 2020 12:55PM ET
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👎
Adegbolade Adebote
Adegbolade Adebote Aug 07, 2020 11:03AM ET
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👍🏾
Monica Kingsley
Monica Kingsley Aug 07, 2020 11:03AM ET
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👍🏾  is all I see. Can you explain please?
Monica Kingsley
Monica Kingsley Aug 07, 2020 11:03AM ET
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tried converter, thanks for the thumbs up
 
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