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Week Ahead: Strong Jobs Report Could Test Fed and Short-Term Rally

By Pinchas Cohen/Investing.comMarket OverviewDec 04, 2022 08:31AM ET
www.investing.com/analysis/week-ahead-strong-jobs-report-could-test-fed-and-shortterm-rally-200633101
Week Ahead: Strong Jobs Report Could Test Fed and Short-Term Rally
By Pinchas Cohen/Investing.com   |  Dec 04, 2022 08:31AM ET
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  • More new jobs than expected to keep inflation hot
  • Will Fed turn hawkish again?
  • S&P 500's short-term rally facing a medium-term downtrend
  • Growth stocks are on the rise, while long term favors defensive sectors

The market narrative has investors repositioning for the growing possibility of an outright recession amid the most aggressive path to tightening since the 1980s. Accordingly, the U.S. Treasury yield inverted the most since 1981 - a recession-leading indicator.

The popular opinion is that November's robust employment data stands in contrast to an economic decline. However, I would argue the reverse: the more new jobs are created, the further the economy will overheat, allowing, if not forcing, the Federal Reserve to keep raising rates, thus increasing the odds of a recession. Here I expand on that.

Investors are grappling with how much the stock market has already factored in a recession. Since 1950 the average recession selloff has been 29%.

The S&P 500 has lost a quarter of its value from its all-time high this year - the average decline. However, in the 26 bear markets since 1929, the popular gauge shed 35.6% over an average of 289 days, or roughly nine and a half months, according to financial institution Hartford Funds.

Irrespective of the fundamentals, I have been providing bearish calls since the market topped out technically.

Source: Investing.com

A strict reading would characterize the current medium-term trend as sideways. However, if the short-term rally completes the rising wedge with a downside breakout, it will retest the October low. If it falls lower, as I predicted, it may form a head-and-shoulders continuation pattern, implying a near-700-point downside move from the breakout point - which is difficult to determine given the downward-sloping nature of the neckline - mirroring the H&S top above.

In examining the S&P 500 sectors, I am seeing that technology and communication services have been picking up in the monthly and three-month timeframe. Will their short-term rally be the beginning of a reversal? I don't think so. These growth stocks are rising because the market has been risk-on in the short term. However, if the medium-term downtrend resumes, they will fall again. In the six-month and year-to-date views, the technology sectors are underperforming, and industries that would do better in a recession are leading: consumer staples, utilities, and healthcare.

The dollar dropped Friday after Chicago Fed President Charles Evans said the central bank would probably tame its rate increases. On the other hand, Evans warned that the Fed might need to raise rates "slightly higher" than what had been anticipated in September. The dollar shed 6% of value in November, making for its worst month since September 2010, as traders reversed positions according to expectations for a slowing rate hike.

Dollar Index Daily Chart
Dollar Index Daily Chart

Source: Investing.com

The dollar completed a bearish pennant, implying the greenback will test the psychological round-number level of 100. However, beware of the dual support of the trendline connecting the highs since 2017 and the uptrend line from the June 2021 low.

Gold surged 1% on Wednesday as Fed Chair Jerome Powell said the central bank may slow hikes "as soon as the December meeting." At the same time, he warned that inflation is not over (the Fed's preferred gauge for this is the PCE). Still, the robust employment data on Friday pushed gold from a four-month peak - but there could also be technical drivers.

Gold Weekly Chart
Gold Weekly Chart

Source: Investing.com

On the daily chart, gold formed a hanging man on top of the 200-day MA precisely at the August highs, confirming the potential for a reversal after it fell below the uptrend line for the first time since March 2021.

As aforementioned, Powell said on Wednesday that interest rate hikes will likely slow, but the Fed will keep raising rates, and inflation will continue to climb. Employment numbers have shot up, showing just how strong the economic growth is - and growth is not beneficial for inflation in a Keynesian economy. If you're confused about the fundamentals, you're in good company. What is almost inevitable: We can expect choppiness in markets.

Disclosure: At the time of publication, the author had no positions in the securities mentioned.

**

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Week Ahead: Strong Jobs Report Could Test Fed and Short-Term Rally
 

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Week Ahead: Strong Jobs Report Could Test Fed and Short-Term Rally

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Comments (17)
Nadeem khan
Nadeem khan Jan 27, 2023 9:28AM ET
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JOYLENE Sami
JOYLENE Sami Dec 07, 2022 4:46PM ET
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Is anyone here help me with how this app work 🏢 for investment?
Dan Weiss
Dan Weiss Dec 05, 2022 11:13PM ET
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Between a rock and a hard place.  Gotta love it.
Saun Melkon
Saun Melkon Dec 05, 2022 7:02PM ET
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You ALL know that long-term bonds at 3.50 yields when 2-year bonds are yielding 4.20, does not indicate recession but market MANIPULATION by the Fed who are surreptitiously buying long-term bonds on the sly. No-one would buy 30-year bonds yielding .70 less than 2-years when inflation is this high, REGARDLESS of whether a recession is imminent or not. You KNOW this.
NARESH RAMAKRISHNA
NARESH RAMAKRISHNA Dec 05, 2022 12:28PM ET
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Good analysis.
Shahzad Hussain Viha
Shahzad Hussain Viha Dec 05, 2022 12:57AM ET
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exlint
Rick Carter
Rick Carter Dec 05, 2022 12:05AM ET
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In all honesty, Pinchas called the oil bear market, a soft dollar, and a market slide. If the S&P breaks through the upper channel, we can say he was wrong. However, if it fails, that would make him 3 for 3, batting 1000%. So what's the problem here?
Rogelio Quintero
Rogelio Quintero Dec 04, 2022 9:23PM ET
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Great, thanks so much.
Boaz Levinson
Boaz Levinson Dec 04, 2022 6:16PM ET
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thanks for the great article
Nuno Lou
Nuno Lou Dec 04, 2022 5:12PM ET
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I don't understand why FED saying they need to go higher for longer in rate hikes than expected in September, are considered dovish
 
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