TSP Talk – Jobs report triggers sell-off / rebound

Good morning. It’s time for our Monday morning TSP Talk:

As we talked about on Friday on TSP Talk, the jobs report was going to be the news of the day, and boy was it. Stocks dropped sharply, but rebounded strongly by the close. Where does that leave us now?

It was reported that there was a loss of 533,000 jobs in November, over 200,000 more than was estimated. October’s jobs report was also revised from a loss of 240,000 jobs to 320,000. This was absolutely awful news, and the market dropped hard early on. We mentioned on Friday that there is a tendency for the market reverse course after the initial reaction to a jobs report (similar to an FOMC meeting), and the market rebounded sharply in the afternoon. Those reversals have usually taken a day or two to occur, but lately things are happening much more quickly.

In the past, a sharp rally on a Friday afternoon would almost automatically trigger a rally on Monday morning, and it may happen today, but now it is tough to trust a rally because the fundamentals are so shaky. Every rally has to be questioned as to its motive. Was it real buying, just a short covering rally, or could it have been some big money trying to prop up the indices in order to sell higher?

Sounds like a conspiracy theory, and there may not be big enough investors out there to do that, but there really was no bullish reason for the market to rebound like that, in my opinion. There are some reasons to be skeptical. For one thing, volume was on the light side compared to other recent market reversals, and the S&P has still not made it above overhead resistance.

Chart provided courtesy of www.decisionpoint.com

The market is also still leaning toward being overbought, and being invested in stocks in an overbought market has been financial suicide the past few months. So unless you think things are turning fundamentally, we are still in a very tough market environment.

Chart provided courtesy of www.decisionpoint.com

Taking that another step, let’s look at another group of overbought/oversold type indicators that decisionpoint.com provides. They are the CVI, STVO, and VTO.

Chart provided courtesy of www.decisionpoint.com

Nothing here looks good. You can read more about these indicators on decisinpoint.com. Here is their basic definition, and you can click on the link below for a more detailed explanation of the indicators.

On-Balance Volume (OBV) Indicator Set: The Climactic Volume Indicator (CVI) measures extreme OBV movement within the context of a short-term OBV envelope for each stock in the index. The Short-Term Volume Oscillator (STVO) is a 5-day moving average of the CVI. The Volume Trend Oscillator (VTO) summarizes rising and falling OBV trends. These charts tell us if the index is overbought or oversold based upon volume in three different time frames. To read more click here.

Bonds have gone through the roof – almost literally. Here is the long-term monthly chart of bonds going back over 20-years. This market environment has triggered a flight to quality that we have not seen in many years.

Chart provided courtesy of www.decisionpoint.com

Here’s what it looks like on the daily chart. Parabolic!

Chart provided courtesy of www.decisionpoint.com

Bonds are certainly overbought and due for a pullback, but like the oil or U.S. dollar markets, the moves can last longer than would seem reasonable. If stocks do rebound, look for bonds (and the F-fund) to fall sharply. If stocks can’t get above resistance, the bond rally will likely continue.

So the jobs report triggered a sell-off, then a sharp rebound. The question is, which was the fake out – the sell-off or the late rally? I think we will find out soon enough. As much as stocks have been beaten down, I don’t think they have enough strength to push past resistance for any length of time. Watch the 900 level. Be wary of a gap open higher this morning, as the overnight futures are indicating. Monday morning gaps have a tendency to close quickly. If the market can overcome all of these obstacles, we’ll have to consider the possibility of a real Santa Claus rally. Until then, caution and capital preservation sounds like the best plan.

That’s all for today. Thanks for reading.

Tom Crowley

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