stocks

Really ... A Real Recovery Redux?

Since 2009 we've put forth a very important idea every time the consensus began to believe a real US economic recovery would take hold.

Actually, two ideas ...

First, we figured there was always too much deflationary pressure for a real, sustainable recovery to take hold.

Second, assuming we were wrong about the first idea, we feared what a recovery would mean for the US stock market. 

We cannot stress enough that market prices are driven by sentiment, human nature. Improving sentiment for the real economy has the potential to undermine the market.

Let me explain ...

I met a friend at a coffee shop on Friday. (In case you were wondering, I'm one of the few remaining hold outs in this cultural piece de resistance -- I do not drink coffee. So I drank some fancy chai thing. I think it's some kind of tea.) He's in the market to buy a house. And I also know some guys who are in the market to sell a house.

So we discussed how new home-buyers may be coming into the market now. There are two reasons for this (besides the typical "buy low" mentality):

1) Many past short-sellers are now eligible to get a mortgage again.

2) Buyers may be looking to seize the opportunity to lock in low interest rates.

The latter point is critical. Keep it in mind ...

Also on Friday I was passed along an article by David Malpass writing in the Wall Street Journal:

The Fed's Tapering is Already Paying Off

Malpass argues the Fed's tapering is already making room for lending to be made to individuals and small businesses. He also argues this trend will actually, finally, create jobs and drive real economic growth. 

There was one very brief mention of how Fed policy has effectively driven capital to the "Haves" at the expense of the "Have-nots." In other words: the rich get richer. (I'll say no more about income gap dynamics so I can avoid contracting a case of the Mondays.)

But let me take Malpass's article to its logical conclusion for the stock market ...

If the Fed is believed to continue tapering and completely end its bond-buying program in a few quarters, then soon thereafter they'll probably be inclined to remove their very visible hand from atop the Fed Funds Rate.

Any signal to that effect will allow interest rates to rise. That's not to say they will, but the odds are greater that they will rise once the Fed assumes a lesser role in manipulating the cost of money.

Yet well before the Fed changes its low interest rate policy, investors are likely to react. 

Along with hints of economic recovery, the expectations for rising interest rates will drive the demand for lending. Small business and individuals looking to pump money into real economy investments will be looking to grab loans at near-historically low interest rates.

So ... kinda sounds like gravy on a biscuit -- it's all good, right?

Not so fast.

Part of the "rich get richer" dynamic that's been emboldened by the Fed's extraordinary monetary policy has been the rise in asset prices. Considering that in said monetary environment the money was flowing into banks and financial institutions while much of the rest of the country remained mired in mediocrity, the eventual destination for most Fed liquidity was not the real economy but, rather, the stock market.

Now consider the levels at which major US averages are now trading -- historic highs, more or less.

Indeed, there are a lot of bears out there who can't justify these levels. (That, from a contrarian's point of view, however, does suggest the market can still press a bit higher in the near-term.) As the opportunity for out-sized gains in the stock market diminishes, capital will seek other sources of return.

A source of return that has long been absent is investment in the real economy.

It may seem like improving economic fundamentals are a plus for the stock market too. But for now we've got to look at it in the context of capital flows, I think.

The Fed has created an environment where investors are addicted to capital flowing between asset markets. The Fed's departure (and consequent expectations for a rising economy and rising interest rates) could open the door for a reversal in these capital flows.

Certainly the Fed is going to do their best balancing act to avert any significant drop in market capitalization lest their "wealth effect" efforts be thwarted.

But I think there will come a point when the market is going to run out of buyers willing to buy high and hope for higher.

Maybe the reaction to Wednesday's FOMC meeting will offer some clues ...

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-JR

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Comment

December: History versus Taper

It's that jolly time of year again.

The bears are in hibernation and the bulls are getting fat. I've been seeing reminders here and there: Decembers are good for the market, don't you know?

Very well. Without pretending I did the research, let me steer you to Variant Perception for some stats to back up the December-to-remember claims.

The moral of the story: Buy today and come back once your New Year's hangover wears off.

If, however, you're monitoring potential reasons the consensus will get caught in a long-winter's nap, you don't have to look much further than taper talk.

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In every December on record till now, the market has not had to deal with "tapering." To be sure, I am confident the Fed is NOT going to taper in December. And though a lot can happen in three months, I'd be willing to bet they don't taper in March either.

But guess what? What I think generally doesn't matter to the consensus.

What matters is how the crowd wrestles with this idea. Let's assume incoming data remains positive. Belief that the Federal Reserve tapering decision is data dependent will go a long way into feeding tapering expectations. Further, belief the Federal Reserve is dependent on growth and unemployment levels will be the primary catalyst should tapering concerns flare up.

This isn't to say the December exclamation point on this year's rally will be denied. December may turn into another positive data point. After all, though the charts of major US equity averages appear extended, they still look quite strong.

But it is to say be careful not to become complacent. If too many find comfort in the history of December, the market will become vulnerable. Just because there's egg nog to fall back on, doesn't mean the jolly souls won't freak out if they think the punch bowl is going to get taken away.

S&P 500 futures are at record highs, but momentum isn't confirming the move:

 

Can someone please pass the punch?

And then can someone explain what it would mean for stocks if bond prices are propelled higher here?

-JR Crooks 

Comment

Reason #1: An ENDING expanding diagonal in the Dow

There is a lifecycle of a trend. And breaking it down into five stages might look something like this:

Stage 1: Accumulation
Stage 2: Denial
Stage 3: Conviction
Stage 4: Doubt
Stage 5: Overshoot

Using the S&P 500, I think we may be nearing Stage 4: Doubt ...

A trend's lifecycle certinly doesn't have to break down into five nice, neat stages. But based on what we've seen from this trend since 2009, it appears as though we're nearing the start of Stage 4: Doubt. (I've drawn in an alternate scenario in red that suggests what coming action would look like if we're actually already in Stage 5: Overshoot. But that doesn't appear as likely at this point.)

But is there anything else to suggest Stage 3: Conviction is coming to an end?

Yes. I would argue there is a litany of reasons. In fact, we're preparing this long list of reasons for members of our Global Investor trading newsletter. And it will be published later today. If you're interested in staying plugged in to what's driving markets, and if you're interested in explicit ETF trading ideas, then I suggest you snag yourself an early Christmas present.

Anyway, the reasons span from deflation in Europe to contrarian signals in key sentiment guages. But because I'm a nice guy, I'll give you reason #1 right now ...

Reason #1: An ENDING expanding diagonal showing up on Dow Industrials

The trend described above is going on five years running. And as I said, the lifecycle of a trend doesn't always breakdown into five tidy stages. So let's zoom in a bit for confirmation that the technical setup may be turning bearish for US equity averages.

I point you to the Dow Industrials:

A review of Elliott Wave Principle by Frost & Prechter reminded me of diagonals, particularly ending expanding diagonals. That's what I've drawn in on the chart above. It suggests the Dow has exhausted its upside and is due for a significant retracement.

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That's all for now.

If you want the rest of the reasons we're nearing Stage 4: Doubt, then I encourage you to have your mind blown with a Global Investor subscription. [And don't forget: ClearPoint can easily and efficiently execute any of our trading newsletters.]

Have a great weekend.

-JR Crooks

Comment

Exciting times. And are stocks worth the risk?

First, we want to make you aware of some exciting opportunities in the works here at Black Swan Capital.

We've been fortunate enough to forge new working relationships with some real professionals in the financial industry. The ultimate aim of these partnerships is to bring you services and opportunities that hep you trade and invest successfully.

More specifically, these relationships make it easier to use and manage the ideas provided in BLACKSWAN's Premium Service trading newsletters.

We'll begin unveiling these relationships starting this week. So stay tuned to Currency Currents to learn about ways you can build a successful trading approach to capital markets.

Now let's talk about the markets ...

Are stocks worth the risk at these levels?

A friend of ours, Terence Brogan at Brogan Group Research, passed a chart along to us this morning. He gave me permission to share it with you. It shows the recent action in the US dollar index futures. More importantly, it shows that money flows barely budged during the recent short-covering rally we saw:

[Click on thumbnail to view full-size image.]

Here are some additional comments from Terence:

There has been very minimal accumulation of the USD since June ... from a price and volume perspective. The USD has been closing below its daily mean price more days that not, and on the days that it has closed above its daily mean price it has not been on persistent high volume. This tells us that there have been more sellers than buyers of the USD since June this year.

Basically, considering the money flow models developed by Brogan Group Research, this all suggests the US dollar is in for renewed downside pressure.

We'd have to agree. In fact, Jack's analysis is suggesting further short-term weakness (at least) is in store for the buck. And he's already recommended ways subscribers of his Black Swan Forex service -- BSFX -- can trade this price action. (Click here to subscribe or read more about BSFX.)

This US dollar action, as one might suspect, probably feeds into the general risk appetite mood of markets. In other words: because financial markets have become so tied to the flow of dollar-based liquidity around the globe, a falling dollar suggests this outward flow of dollars in search of return will persist.

All that in mind, the continued rise in the stock market prompted Jack to ask Terence if we'll see risk aversion rear its head ever again.

That's certainly the question of the day. Commentary is swirling something fierce about potential unintended consequences of Federal Reserve monetary policy, e.g. asset bubbles.

Meanwhile US stock markets are railroading higher and dragging global stocks higher alongside. Take a look at this weekly chart of the S&P 500 -- I've drawn in key trend channels that go back as far as 2009:

I also applied a Fibonacci extension to the first part of the bull market rally that began in 2009 and went through March 2011. It shows we've now fully extended (100%) that initial wave as trend channel congestion now may begin providing resistance. 

Does this mean the S&P can't or won't go even higher from here? Of course not.

But I think it does add to rationales for why the upside might be exhausted at these levels. With all the talk of bubbles circling the markets, and the continued speculation about the integrity of economic recovery around the globe, do items like this not create further doubt?

I believe a sell-off could materialize as enthusiastic investors and traders start asking themselves: is it worth the risk?

You can debate valuations back and forth till the cows come home. But up until recently, the landscape of global economics and financial markets has proven that investing in the US stock market was easily worth the risk.

But just as rising feed prices influence demand from livestock operations, rising asset prices reduce the demand from investors and traders who see potential risks growing and potential rewards dwindling.

One final chart -- margin debt on the NYSE:

Basically, the point of showing the rise to record levels of margin debt -- i.e. traders borrowing in order to invest in stocks -- is to highlight the fact that there are probably many weak hands in the market right now. It is they who will run scared at any sign of heightened market uncertainty. It is they who'll add to the selling momentum in any "abnormal" downturn.

It is they who threaten the risk appetite mood. Thus, it is they who threaten the money flows that are keeping pressure on the value of the dollar. When investors run scared in a herd-like fashion, these money flows tend to reverse as they accumulate US dollars. 

This isn't necessarily something to act on now. But it is something to keep in mind, all things considered.

Remember: Stay tuned!

-JR Crooks

Comment

The market "reprieve" goes "full risk-on"

Last Thursday I wrote the following in Currency Currents:

"September is well known for being the worst month for US equity market performance. That may be reason enough to expect the opposite in the early going. After all, the catalysts for market weakness -- mainly concern for emerging markets and rising interest rates -- are probably overdone in the near-term.

"I expect a reprieve from general selling pressure in global equity markets and other risk assets over the next few weeks. In that environment, the US dollar probably will be pressured lower. Once the US dollar is again looked at as a dog, it should be about time for it to head higher as many have been quick to forecast in recent months."

I was reading a Bloomberg article this morning and read an analyst's reaction to recent economic data and market action. Effectively he said:

"Markets are full risk-on mode."

I suppose we are. Three things to consider:

1) The view in China is a major impetus -- better-than-expected export and industrial production numbers yesterday and today, respectively, are helping to drive the rally in Chinese and emerging market equities. 

2) Russia apparently has a respectable proposal on the table that would see Syria give up its chemical weapons and bring an end to the face-off that's unnerving market players. I can't yet say with any confidence that Russia engineered this Syria fiasco, but I can say they seem to be coming away with increased global influence. Russia has been mocking the US by pointing out the insanity and inanity of America's social policy disputes. And now Russia is seen to be driving the dimplomatic efforts in the Middle East.

3) The Fed will always be in the picture. And it seems Friday's Nonfarm Payrolls report is being used as a rationale for why risk is on this week. It's not surprising.

The question, of course, is this: how long will risk appetite remain the impetus du jour?

As I said, I thought this reprieve rally might last a few weeks. But a look at several recently beaten down assets shows that the market has bounced back sharply and quickly. It will take persistent optimism to generate additional significant gains going forward.

Perhaps the September bears will emerge next week around triple-witching. But they have to get through the September 17th -18th FOMC meeting first.

S&P 500 chart setup -- finishing a B-wave corrective bounce?

The S&P 500 is testing a key Fibonacci retracement number that could mean the end of this corrective bounce is near.

-JR Crooks 

 

 

Comment

Setting up for a US growth disappointment

It seems the US trade deficit data released yesterday went largely unnoticed. And that's usually how it goes each month, probably because there tends not to be much, if any, knee-jerk market reaction to that report.

But considering how most markets have been moving this week (up), it got me thinking about how the trade numbers might influence markets over the next few weeks ...

To recap: the US trade deficit widened sharply in August. That followed the previous month's narrowing to a level not seen since October 2009.

I was particularly wondering how this might impact the US dollar. There is not a tight correlation between the US trade balance and the US dollar, especially over the shorter-term. But the widening trade deficit is a nod to the typical dynamic -- trade imbalances -- that's characterized global growth over the last decade.

Manufacturing PMIs in US, Europe and China are all higher in the most recent month, poking above the 50-level that delineates expansion and contraction.

Despite the recent scare over emerging markets, many are quick to notice a general stabilization in global growth expectations.The US economy has been the least of the concern for investors. But if the world is seen to be stepping back into what's been a typical growth pattern, then maybe Asia (namely China) gets cut some slack. 

In an environment where things seem to be "back to normal," then maybe we see capital exit the US in search of return. Maybe the US dollar loses any safe-haven appeal and is potentially looked at as a funding currency. And maybe most markets around the world feel a reprieve from recent selling pressure.

Obviously this is all speculation on my part. And it's all speculation that I imagine would run its course in a relatively short period of time, say three to six weeks.

So I may be stretching it to think the trade deficit could have such an influence on markets in that amount of time.

But one reason (among many) I tend to think such a "back to normal" growth mentality won't last too long: the recent US GDP beat was driven largely by a surge in exports.

As mentioned, the latest trade deficit number showed the surge in US exports reversed last month. In other words: come the end of September or early October, everyone may be rethinking their expectations for the US economy. And if they start rethinking the US, chances are they'll start rethinking global growth as well.

This chart is from Part 5 of a five-part series The Wall Street Journal put together on "China's Rising Risks." Click the image to access the article.

September is well known for being the worst month for US equity market performance. That may be reason enough to expect the opposite in the early going. After all, the catalysts for market weakness -- mainly concern for emerging markets and rising interest rates -- are probably overdone in the near-term.

I expect a reprieve from general selling pressure in global equity markets and other risk assets over the next few weeks. In that environment, the US dollar probably will be pressured lower. Once the US dollar is again looked at as a dog, it should be about time for it to head higher as many have been quick to forecast in recent months.

-JR Crooks

 

Comment

The great Treasury explosion is coming

Take what you want from that headline!

The point I want to make is this:

We could soon witness a sharp and steep, though perhaps short-lived, rally in Treasury prices.

To be sure, I began to think we were due for a rally in Treasury prices back in June. That's when prices had already taken a big hit and there was a palpable risk-off mood in other asset classes. I thought Treasuries might get a a safe-haven boost in such an environment.

Apparently there were plenty of others who thought the same thing. Because the negative mood came and went with barely a hiccup in Treasury prices' downtrend. In fact, anyone who positioned for a rally in Treasury prices were devoured by the bears on a renewed surge lower.

And that leaves us where we are today. The downside has become quite extended. And it appears the trade is becoming a bit lopsided as the fundamentals are shaping up in such a way to confirm the suspicions driving Treasury prices lower.

But we know the market. And most of us probably respect the buy-the-rumor-sell-the-news dynamic. In this case, however, it'll be a sell-the-rumor-buy-the-news dynamic if Treasuries do rally.

As we near an anciticpated announcement of Federal Reserve tapering, Treasury prices appear ripe for a sharp, corrective rally. The catalyst may be less hawkishness -- less taper -- than expected. At the same time, I looked at the latest CFTC Commitment of Traders (COT) data yesterday morning ...

With regards to positioning in 10-Year Treasury note futures, the speculators are running an extreme net short position (bearish) while the commercials are running an extreme net long position (bullish). At extremes, the commercials tend to have it right and the speculators tend to have it wrong. Check out the following chart for a visual on this idea:

 

Is this explosion to the upside going to happen today? Maybe. Tomorrow? Maybe. This week? Perhaps.

It may make sense to monitor the COT data for confirmation, i.e. wait till positioning begins to reverse before throwing your bets down. (You can get the newest data as early at 3:30 Eastern on Friday afternoon.)

But needless to say, even if we are in a long-term downtrend for Treasuries (uptrend for yields), it appears a corrective rally is due to commence very soon.

 

-JR Crooks

 

Comment

Can the Fed rest? An experiment in social resilience ...

Most of the headlines this morning blame yesterday’s market fallout on expectations of Fed tapering. Many are citing the improvement in US economic data as evidence the Fed doesn’t need to keep its bond and MBS purchases going.

Critics have rightly lumped blame on the Fed’s QE policies for failing to directly and efficiently energize the real economy. But it’s hard to argue against the influence it’s had on investor sentiment over time.

That slow improvement in sentiment seems to have finally restored confidence enough to generate legitimate new loan activity. Here is a chart of US commercial & industrial loans: 

 

Since 2011 it’s been a steady climb and this metric is approaching the 2009 peak level. It took two years and two rounds of QE, but demand for C&I loans returned.

That this data is on the verge of retaking pre-crisis levels can be cited as additional evidence the US economy can stand on its own without the Fed’s omnipresence. Of course, a Fed exit could generate nervousness and create a relapse that sees the credit markets seize up again. After all, willingness to lend and borrowing was at the heart of the financial crisis (it was not so much a matter of banks’ ability, or inability, to lend.)

So, what’s my point?

Well, I think the Fed is still worried about conditions outside the US, namely Eurozone banks, as it considers its exit strategy.

So I went to the European Central Bank’s website this morning to find their equivalent of commercial & industrial loan activity. Here it is, monetary and financial loans to non-financial corporations: 

 

Not only is this metric not approaching its pre-crisis peak, it’s actually at its lowest level since the crisis hit in 2008/09. And it goes to the point that Europe is not out of the woods.

Despite the relative improvement in Eurozone economic sentiment in recent weeks, the potential for its economy and debt levels to improve remain poor. Jack sent me this chart from The Wall Street Journal earlier today:

 

Needless to say, Europe’s financial system remains vulnerable. Quality collateral is an issue as its banks seek to bolster their balance sheets in an environment where demand for loans that drive economic growth is wallowing.

There is a scarcity of quality collateral that necessitates new collateral creation of less quality ... as well as a system willing to accept it. The problem here resides in the resulting increased interconnectedness between collateral and financial markets. As the banking system becomes more tightly coupled with the markets and securitization through this new collateral, the impact from a market shock is intensified and and spurs a negative feedback loop where quality collateral becomes more scarce.

Considering how much money the Federal Reserve is providing to foreign banks (more than $1 trillion and more than to US banks, YTD as of July 31) you have to think it harbors significant concern for European banks in particular. The Fed realizes its departure from QE could very easily and very likely generate a sharp drop in the market, even if the decline is relatively short-lived and the US economy is truly on solid footing.

But even those who think Europe’s economic decline is moderating won’t dare suggest Europe is on solid footing. So what type of contagion will spread from Europe if a Fed-induced market shock sends their financial system, the largest in the world, reeling?

Certainly not any type the Fed welcomes (unless of course the Fed truly wants to end the global dependency and untintended consequences of its monetary policy -- ha!)

I suppose the Fed is between a rock and a hard place -- succumb to the pressures from the BIS who cited growing risked from increased QE ... or risk contagion from a European banking system that's left to fend for itself (so to speak)?

Considering their "do something, do anything, to mend the global economy" track record, I suspect they'll err on the side of keeping QE in play so as to manage the markets and bide more time for Europe.

It's be interesting to see how this experiment works out ...

 

-JR Crooks

Comment

Japan is all that matters right now

It seems many have come to accept the macro environment we'll face for many quarters, if not years, to come. Central banks have firmly planted their policies into the market and they won't be uprooting them anytime soon.

The only hiccups will come if the market says so.

And the market may say so only if unprecedented policy breeds instability, tangible unintended consequences.

We've talked before about how emerging markets tend to see this instability arise in their economies since their central banks cannot keep pace with developed-market central banks, and their capital markets cannot absorb policy measures the same way more developed capital markets can. 

But it seems there may be some risk of instability in a major economy where the central bank has committed itself to making monetary policy the answer.

That economy is Japan.

A friend, reader and Member of Black Swan Capital asked me some questions about Japan a few weeks ago:

If Japan reaches their 2% inflation in a year or two, will that force them to also raise yields on their bonds?

If yes, how will they be able to afford paying all that interest on their 220% of GDP debt?

Seems like the increased interest costs will bankrupt them?

Here was my answer to him:

Of course, we do have to see inflation ACTUALLY increase in Japan – easier said than done for them!

If interest rates do go up, Japan will run into some issues. Remember: they can print money. And they do have some flexibility to generate tax revenue, at least relative to Europe, but if the market forces the interest rate issue then the pressure may become too much too soon. That, though, would then reduce growth in the economy and conceivably reduce inflation pressure as well. So it’s a fine line they walk. 

If interest rates do rise, for whatever reason, Japan will feel pressure. And they realize this is a risk even though they do have some buffer to handle initial financing pressures. The recent volatility in JGBs is already raising warning flags.

Apparently, the Bank of Japan has been in the market trying to suppress interest rates nearly every day since April 4th. And the BOJ is pledging to buy up even more bonds.

Basically, there is a risk to the markets if interest rate increases are based entirely on inflation expectations rather than economic growth expectations. Those risks already seem to be emerging as the Nikkei has lost about 7% in the last two days and the yen has begun to strengthen.

Despite all the risks in Europe and the apparent disconnect between US stocks and the US economy, it seems Japan is/will be the catalyst for any market downside in the near future.

Besides any direct influence a reversal in the yen or JGBs or the Nikkei will have on capital flows, it may actually bring to light some other issues these yen-based capital flows have helped to mask. Namely, the unwarranted positioning in European sovereign bonds. The recent action has helped bring Greek yields down to levels unimaginable after what's happened to that economy. Yields on Italian and Spanish bonds have also fallen for this reason.

With no change in the underlying recessionary economies across the Eurozone, rising interest rates would bring back pressure on the banking system and show that no progress has been made (even as it was reported the US has pumped over $1 trillion into foreign banks.)

This really has the potential to get ugly in a hurry, which may come as a surprise for so many who see central bank policy as an unwavering and unshakeable force driving global asset prices higher.

Can Japan keep investors from getting spooked?

Jack just sent a piece of technical analysis to his Members of Black Swan Forex. It lays out a pattern that suggests USD/JPY has a lot of room to fall in the near-term. If you'd like to receive this analysis, his commentary, and specific trading alerts, you can read more here ... or sign up using any one of the buttons below.

 

-JR Crooks

P.S. If you are interested in Black Swan Forex, but you're unsure if it's the right fit, we run a 30-day money-back GUARANTEE. In other words: get the analysis and the alerts ... and if you cancel within the first 30 days we'll give you back every penny of your subcription cost. And if you were to cancel after that, we'd refund you any unused portion of your subscription. You can't beat that offer! Sign up today ...

Comment

Soros: The BOJ “did something so dramatic ... people can’t ignore it!”

Click here to read this issue in PDF format.

Are we there yet?

Are we at the point where people might ignore the central banks?

Thankfully, maybe.

George Soros made a valid point to a CNBC interviewer recently. He noted the Bank of Japan made a dramatic move with monetary policy stimulus so that it wouldn’t be overlooked.

I think that idea was obvious. But Soros lends a lot of credibility to an idea based on his investment track record.

But he also may signal something more.

Being longer in his years, and evermore notorious as a left-wing political beacon, it seems Mr. Soros strains to toe the line laid down during media training.

In other words: he wants to say what’s on his mind but must choose his words carefully.

What I believe Soros would say if he were not in front of a camera is this:

“The influence of central bank stimulus policy is at risk of wearing off. While some may admit central banks did help to boost sentiment and loosen up credit markets, the measly pace of stop-and-go recovery is threatening to reveal that the effectiveness of central bankers’ tools is limited. The real risk now is that people aren’t encouraged to play along and money truly never makes it into the real economy as promised.”

Ok, that’s enough of pretending to be George Soros for one day.

The ongoing deliberations among Eurozone leaders and Troika officials tell us that austerity isn’t so popular and neither is dumping bailout liability onto taxpayers. Achieving the proposed resolution of a banking union will be difficult and should keep the European Central Bank very-much hogtied.

The measures undertaken by the Bank of Japan this week to target the monetary base have been tried before, to a degree. The measures didn’t work then.  Now it seems the Japanese government is desperate and hopes the measures will succeed this time. Their overly-confident rhetoric also reeks of desperation.

The Federal Reserve is fully committed, but they can only do so much while they hold their breath and hope the unemployment situation improves sufficiently. They’ve got to be thinking the deflationary forces must be strong for their policies to have not turned up any inflation worth speaking of.

Earlier this morning the March US Nonfarm Payrolls were reported. It was a disappointment.

Instead of adding anywhere near the anticipated 200,000 new jobs, the economy only added 88,000. There were, however, upward revisions to January and February numbers.

The market is acting poorly, as one might have predicted.

I went into it thinking today’s report represented a bigger downside risk for markets than it has in a long time.

Why?

Because market mood has deteriorated this week. And markets seemed very vulnerable to a potential disappointing jobs number. Though we’ve seen widely-accepted “improvement” in the labor market, even the hiccups have been met with optimism; we’ve come to assume even a bad number is good because it means the Fed will keep on keeping on.

While no one expects the Fed to be planning its exit, the “Fed to the rescue” mentality may be overdone insofar as it influences short-term reaction to data and reports.

The expectations for US economic outperformance, relative to its peers, seems to have been the only crutch keeping the US market from giving way to Cyprus uncertainty and underwhelming price action in other asset classes.

So it’s not hard to see why today’s jobs number is pressuring US stocks (and even the US dollar at the same time.)

Besides, the market is certainly ripe for a correction and the technicals looked poised to drive the market lower (regardless of the jobs number). Below is a daily chart of the S&P 500 futures showing a fifth-wave extension/rising wedge set-up that suggests a significant reversal; first level of Fibonacci support comes in at 1,478:

It very much looks like the much-anticipated correction has begun.

I think that’s the way we have to play it right now, remaining open to more downside than generally expected.

But going forward, I suppose the question is this:

Do central banks have anything left in the toolbox the people can’t ignore?

I certainly don’t want to underestimate the potential central banks will concoct some sort of new and unprecedented strategy. Like I said of the BOJ above – I think policymakers (and politicians) have become desperate.

Of course, if the influence of central banks has truly run its course, then the market may have the opportunity to take over.

It’s just a correction for now. Play it. And reevaluate later.

 

-JR Crooks

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