Big moves yesterday in my main markets, with the exception of stocks. Everyone seemed surprised by the weak US new jobs number, but I wasn’t. It is just maintaining the trend already established (see main chart). Not only is the jobs market drying up, but the labor participation rate continues to sink like a stone. Is this the sign of a healthy employment situation? I think not. When people give up looking for work, that is a sign of negative social mood. Main Street is getting even more divorced from Wall Street.
Now the unemployment rate has fallen to 6.7% (lowest since October 2008!), we are a knat’s crotchet away from the Fed target rate. What a sorry mess you have got me in, Ben (nod to Laurel and Hardy). We have the unemployment rate down where they want it (good), but jobs are vanishing (bad). The fly in the ointment is this: workers are leaving the labor market in droves. Now whey is that? Are they back making a killing flipping condos? Are they day-trading tech stocks? I have no answer.
But the fact remains that the Fed is surely in a fix. They desperately want to unwind QE as they know darned well that their mammoth $4 trillion stash of bonds (which is still growing) could easily go under water on a rise in rates. And this rise in rates would also put many homeowners underwater again. The Fed have been eyeing nervously the critical 10-yr Treasury yield as it moved above 3%. My take is that no matter what happens to the data, the Fed will maintain its taper of $10 billion a month until exhausted. Remember, this is the increase of its bond purchases that is slowing down – the pile is getting bigger all the time this year.
In fact, they may even step up the taper rate, emboldened by the projected good GDP data. What do you think this will do for stocks?
Interestingly, bond yields fell hard on the jobs news as I forecast. This seems counter-intuitive. But that’s the way markets are – bullish consensus on Treasuries had fallen to single digits, setting up the short squeeze. One other clue was the assumption by the majority of pundits that interest rates are on the rise. Everyone was commenting on the 3% T-Note yield, saying it was a surprise to many and yields are destined to go higher. I have seen some outlandish projections for 6% – even 8%. Naturally, this message appealed to the contrarian streak in everyone.
Everybody is now a Contrarian!
Have you noticed that in recent years, everyone now wants to be a contrarian. They have been trained to think this way because of the Credit Crunch of 2007/8, which caught most by surprise. This was the biggest fall in values since the Great Depression. And those who owned assets were burned badly. They are certainly not going to make that mistake again!
Yes, contrarianism is the new religion!
And this sets up the new paradigm where the herd is now the mass of contrarians! This is showing up beautifully in gold. Now, because the market has been in sharp decline, the former gold bulls are now gold bears, having turned 180 degrees in their new-found religion. There is none so evangelical as the new converts! Have you known anyone who has just quit smoking? And guess what? Gold is in rally mode and already $70 off its recent lows! Wonderful!
This sets up my new approach – I am looking for contrarians that I can trade with. I have two set-ups already in the T-Bonds and in gold.
I have a note of caution in my forecast: it has not yet broken the Fibonacci 23% retrace and could move to a new high before topping:
The EW count up also is not clearly at the end of a five wave move. The Nasdaq looks better in this regard. But until I see a sharp move down to the 38% level, the option to rally to a new high remains. Early next week should settle the matter. Odda are swinging to a new high before topping.
Contrary to expectations, yields dropped sharply yesterday:
Last week, DSI dropped to 10% bulls and set up t his massive short squeeze. Earlier, I had noted the budding H&S pattern and took long positions on a break of the neckline. The market came back for a farewell kiss on Thursday before rocketing northwards yesterday.
This baby has further to run as the extreme bearishness must be eliminated before the long-term downtrend can be re-established.
I remain long T-Bonds.
Has completed a very pretty 5-waver down and confirmed it with a rally yesterday above the tramline:
So, with the five down, that establishes the main trend is down and to expect an A-B-C relief rally before the trend continues down. But has the rally off Thursday’s w5 low done enough to qualify as complete? It looks like an A-B-C and has hit a Fibonacci resistance level, so in theory, the downtrend should get going early next week.
But to me, it doesn’t look quite right – there could be more backing and filling around here to perhaps the Fib 50% level just above 1.37. Next week should hold the key.
I took some profits in the w5 low and remain short in reduced size.
As in the T-Bonds, traders were caught flat-footed in yesterday’s short squeeze:
Last year, I forecast a $100 – $150 rally in gold to squeeze the shorts, and it appears we are well on track. to hit my target. But first, it must negotiate the meeting of tramline and Fibonacci 38% levels just ahead. Overcoming that, my target is the $1270 level. This will be solid resistance.
The form of the rally could be an A-B-C or we could be in w3 of a five waver. A sharp move up early next week would likely confirm the latter.
I remain long, but will be looking to position short in due course to trade with the main trend. Already,DSI bullish sentiment has edged up from near-zero to a slightly more respectable 30%, so a major upside move over $150 may be limited. But already, gold is up almost $70 off the lows.
Again, sentiment towards the yen has been running at record bearish levels (bullish USD/JY) and the market pushed up into my long-standing Fibonacci target in the 105 – 106 area a few days ago, where I took final profits. Since then, the resistance has proved too much and the market has fallen with a massive drop yesterday:
It has broken my tramline and is heading for the Fibonacci 23% support in the 103 region. The rally is a clear five-waver with a huge negative momentum divergence at the top.
The USD/JY trade is one of reflation (or should that be hyper-inflation?) of the currency.
I remain short, looking for an eventual move to the 90 area.
Have a great weekend!