BarroMetrics Views: Non-Farm Payrolls & the S&P

SentimenTrader has an interesting tidbit for tonight. He says:

The looming Nonfarm Payroll report can be a big market mover, but when the S&P 500 closed at a six-month high with volume that was within 10% of its low from the past month (as it did on Thursday), then the next two days were positive only 12 out of 46 times.  It managed more than a +1% gain only 2 times, but a -1% loss 13 times.

One of the reasons I like so much, both SentimentTrader and Quantifiable Edges, is they adopt such a different approach to mine. As a result, their studies often lead me to think of scenarios that I would not consider.

This does not mean I would ever trade just on the studies - it would not suit me. In this case, e.g.,

• my first question would be: of the 46 times, how often were the expectations met? And the second
• what was the bias of the market - bull or bear - on each of the 46 occasions?

The problem with such questions is that complicates the study.

So, why do I love reading the suggestions? Well, firstly both conduct rigorous studies;  and secondly,  I find the studies augment my bottom line.

For example, today, I can say this: “all things being equal,  a Non-Farm that comes within expectations is more likely to be bearish than not”.  With this in mind, I can factor more robust in response scenarios to tonight’s Non-Farm.

Now in case you think I am talking my book, I do have some long positions going into tonight. Let’s see what the numbers bring.

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BarroMetrics Views: S&P Nearing A Top?

Is the S&P approaching an intermediate high?

Figure 1 shows why I see this as a possibility.

From Oct 10 2010 to Nov 11 2011, we see that the daily ATR was 30 points (with a standard deviation of 10); and the daily volume as 2,301,165 (with a standard deviation of 602,436). Now compare this to the move from Nov 13 2011 to date.

We see a true range of16 points (with a standard deviation of 441,093).  In Steidlmayer terms, the ES is not ‘facilitating trade’ ii.e. the up move is in weak hands. The reason the ES is going up is because there is an absence of large sellers; as a result, the buyers are ‘absorbing’ the limited supply and when that is gone, the ES moves up:

Let’s turn our attention to the small rectangles in Figure 1. We see that the ES forms a small congestion pattern, then spurts up for one day. Another small congestion forms that is followed by a spurt up. 

Figure 2 is the Emini, March, Weekly. It shows we are nearing the Primary Sell Zone of the congestion pattern bounded by 1373.50 to 1068. We also the ES has attained the minimum retracement for a sideways market (78.6%).

These two patterns, the drying up of range and volume as the ES approached the Primary Sell Zone suggests that a top may be nearing.

Figure 3 shows the relationship between the pre-day session and day-session. We see that the volatility is taking place in the Asian and European time zones. This suggests that US traders are still operating under the illusion that the FED will prevent any substantial decline for US Stocks. In turn, this suggests, any sustained selling pressure will have  to originate from Europe - the selling pressure, as in May 2011, must be strong enough to overcome the inertia fostered by the belief in the FED.

This does not mean that we won’t see some sharp drops driven by domestic US news. For example, tomorrow we are expecting to see +135K new jobs with the lower end of the range coming in at 110K. Now, if the number comes in at 100K, we’ll probably see a sell-off on Friday.

What I am saying though is this will not be enough for a sustained sell-off if I am right about the underlying sentiment. For that to be overcome, we need to see a sell driven by large supply; right now, that will probably have to come  from Europe.

FIGURE 1 Daily Emini

FIGURE 2 Weekly Emini

FIGURE 3 Emini 60-minutes

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BarroeMetrics Views: US Presidential Elections

While the election does not of itself affect a trading position, the election of President who was also a Leader is something the world desperately needs. But that prospect seems now a remote possibility.

(And before my US readers deluge my e-mail box, let me say this: in the Asian crisis, US leaders lectured the S-E Asian countries on the benefits of non-intervention - we did not hear then anything about institutions of being ‘too big too fail’. Recent US history is full of examples of ‘do what I say, not what I do’).

I was hoping for a Kennedy, Regan or Clinton; indeed I was hoping that the Republican Party would come up with someone other than an party animal. But, it looks like we’ll see either Newt Gingrich or Mitt Romney. Whatever you may say about them, you’d have to admit they are political animals.

On the Democratic side, we have President Obama who seem totally out of his depth. I think had he succeeded Bill Clinton, he’s have made a better fist of things. Indeed, he may have been remembered as one of the better Presidents. Instead we had two terms of the disaster, better known as George W Bush.

Given the record of Newt Gingrich and Mitt Romney, it is unlikely we’ll see much change from President Obama’s policies.

What they now say they will do, that will change when they come to office. We can expect to see more deficit spending, more cosying between banks and the Government - if nothing else, the Government can rely the need to prop up those that ‘are too big to fail’.

When I first read ShadowStats’ warning that a hyperinflation led depression was on the way, I thought he was wrong. I believed that ‘yes’, there were tough times coming but a deep recession was probably the most likely path. Now, given the recent US policies, I have to admit John Williams may yet prove correct.

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BarroMetrics Views:  Capitalism and Its Critics

This is a short bonus post.

I want to pass on this excellent post by James E Miller that I read on Friday, Jan 27 in the Mises Daily: “Mr. Rubenstein, You’re No Adam Smith“.

James own blog is also always worth a read: http://millergd.blogspot.com/

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BarroMetrics Views: QE 2.5

FOMC night saw QE 2.5. the Fed promised to hold rates at low levels to 2014, viewing inflation as a low probability event

Quite a few of my seminar attendees know that I see QE as threatening hyperinflation.  But despite all the increased money supply, we aren’t seeing an inflation threat.  Sure, we may be seeing an increase (see attached chart from ShadowStats), but the increase it’s a long way away from threatening hyperinflation.

To understand why, you need only turn to the FRED graphs attached.  What you see are the deposits of US banks with the St. Louis Fed and notice that the bulk of the QE funds have been re-deposited with the FED. Until the funds hit Main Street, any inflation threat will be remote.

What would cause the release of the deposits?  The need to see a real improvement in the US unemployment. In a mature economy, employment is driven by the middle class businesses not Fortune 500 companies. And right now, the US middle class is hurting and is unable to secure bank loans. At some point, the FED will feel the need to encourage US banks to  release the funds. It’s then that we’ll see the threat emerge.

The FRED graph  serves another purpose. It gives a 4 to6 week warning of a possible S&P downturn - based on US drivers. Last year’s downturn was not signaled by the FRED - that was driven by European events. Since sub-prim, a drop of US$2B has signaled a top in the S&P. So far in this rally, we have not seen this happen.

ShadowStats CPI

Chart through the courtesy of www.shadowstats.com

FRED (1)

Charts through the courtesy of the St Louis Fed Reserve

FRED (2)

Charts through the courtesy of the St Louis Fed Reserve

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BarroMetrics Views: Greece, Europe and the FED

Since late 2010,  a sentiment has developed in the US markets that the FED will shield the US Stock Market from any overwhelming collapse.  Its solution to print as much money as needed until conditions return to normal. As the 197o’s showed, this is a mistaken belief. The piper to be paid is inflation.

Inflation? What inflation?

A look at the FRED graph shows why inflation is not an issue at the moment. US Banks are depositing the bulk of QE funds with the FED.  But if the unemployment problem is to be solved, banks have to start to lending and that is when the FED will face real problems.  (For a comment on the most recent Unemployment numbers see Cooking the Books).

All this is without taking Europe into consideration.

Looks like the probability of Greek defaulting has risen to over 70%. From public comments, it seems that we are now relying that since Greece is ‘old’ news, contagion won’t occur. There is probably some basis for that belief. But, even if contagion is averted, the Italian problem won’t go away.  I have always believed that Italy will be the break point for Europe.

The ECB has opted to move into ‘back-door’ QE. It now finds that if it is to ’save’ Greece, it will have to take a loss on the bonds it bought. But so far, it is resisting taking any of the 70% loss it is asking other bond holders to take. That does not augur well for the future.

FRED

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BarroMetrics Views: Apple

Apple announced an  EPS of US$13.87 (as compared expectations of US$10.15). The ES jumped from 1308 to 1315.

A just tribute to Steve Job. But…..

My view is it is probable that this will be the best result for time to come. Indeed, I expect Apple to see a decline as Job’s absence is felt.

Steve was a one-man show as far as Apple products are concerned - he and Apple has as close and comfortable fit as you can find.

When Steve left Apple, he was not the same. Oh sure, the publicists may say that the time was used for good purpose - the ideas that later drove Apple innovation. The reality is that at the time of his Apple wilderness, Job was nowhere as effective.

And Apple?

You can decide for yourself: Apple bought NeXt in 1996 (thus bringing Job back to Apple as advisor) and Steve as interim as CEO in 1997. Apple never looked back with Ipod, Ipad, Iphone, Itunes etc.

Can Apple survive without Job. It will; but it will miss his creativity. I expect Apple to come back to the crowd - at a time when financial conditions will be difficult to say the least.

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For me, the end of 2011 brought a personal crisis that has lasted until this morning. I had some news today which brings some sunshine. Let’s hope Dragon Year is good for you and me.

Turning to the markets.

Since the beginning of the year, the S&P has been grinding up in a fashion that suggests a change is likely. But, I have seen this before and on that occasion the S&P rallied over 200 points before breaking.

My premise for the rally was the belief the FED would prevent any long-term collapse. Europe’s crisis place a dent in that belief; but with the ECB using a backdoor to ease quantitatively, the belief appears to have again raised its head. Are we due for a repeat of Nov 2010’s upmove and crash?

Perhaps we have seen the rally. I rate a Greek ‘dirty’ default at 50%. What may not be generally known is some of the bond holders are hedge funds whose interest may be best served by a default because at that point the insurance kicks in. The latest offer is 3% on the new bonds; creditors want at least 4.5%. This has been the position since mid last week. The fact we have not seen the negotiations move forward suggest that, despite public platitudes, things are not going well.

A Greek default would not automatically mean a stock market crash. The question will be whether we’ll see contagion. And that we won’t know until a default occurs - if in fact one does happen.

S&P Weekly

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BarroMetrics Views: Cooking the Books

The stats of some countries, e.g. China, we just can’t believe. To get a handle on their affairs,  we rely on anecdotal evidence or on numbers the Central Government fails to hide.  When I first started trading in the early 70’s, the one country’s stats I felt I could rely on was that of the US. But, this is rapidly becoming a thing of the past.

Let’s take the Non-Farm Payroll on Friday. In particular, I want to look at the job number and the unemployment rate.

Job Number

According to ShadowStats:

“The reported seasonally-adjusted 200,000 jobs surge in December 2011 payrolls included a false, seasonally-adjusted gain of roughly 42,000 in the “Couriers and Messengers” category.  That gain was an artifact of the seasonal-adjustment process and will remove itself in the January 2012 numbers.

We were aware of what seemed to be a buried modeling problem within the Bureau of Labor Statistics’ (BLS) adjustment process, which we expected to come to the fore today and to be modified by the BLS, but the BLS did not correct the series. ….

We asked the BLS for a comment this morning and were told that it was a modeling issue, which the BLS cannot override. ….the 42,000 jobs surge in “Couriers and Messengers” appears to have been the biggest single issue.”

Hmmm sounds suspiciously like a comment that says..’we know the model has a problem but, we cannot change the incorrect result’. The last time I heard a similar comment was in relation to the VAR model that said the sub-prime loans were AAA+. At least, Shadowstats believe the numbers will be self-correcting this month. We’ll see.

Rate

The BLS reported the unemployment rate as being 8.5%.

 That sounds like a great improvement until you realize that the government is not counting millions of unemployed.  So, what we saw was a civilian population  that increased by a reported 1.695 million, and a labour force that rose by scant 274,000.  The BLS the ignored the ‘uncounted unemployed: 1,421,000′ to arrive at  the rate of 8.5%. So, by the magic of cooking the books, we see a ‘falling’  unemployment rate. 

What is the true rate?

Surprisingly, the BLS continues to track a reasonable estimate of what the unemployment rate should be. It’s the U-6 statistic in the report. That number shows 15.2% unemployment!   So, we can say that so far as the BLS is concerned when we include all the ‘ignoreds’, the rate is 15.2%. But, even that is not the ‘real’ number according to ShadowStats - its  number is closer to 22.5%!

Here is how ShadowStats arrives at its numbers: “The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.”

Given these numbers, sooner or later, the FED will pressure the banks to lend. Indeed the FRED graph is rapidly approaching a decline which in the past has signaled a top in the S&P - but that is a story for another day.

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BarroMetrics Views: Wish to See

One of the pitfalls traders face is “seeing what we wish to see”; and often, the market will accommodate us.

Take the S&P last week - the price action had enough signs to satisfy both bull and bear.

We started with the seasonal bullish start on Jan 3. The bulls were clearly in control. Thereafter the picture is less clear.

On the bull sign we can argue that:

a) After Jan 3, the S&P attempted on each of the three days (especially Jan 4 and Jan 5) to sell-off and failed.

b) On Jan 4 and 5, the sellers exhausted themselves and the S&P broke through the open and closed near the highs.

c) The S&P closed on the week on its highs.

On the Bear side:

a) The buyers, in the face of a lack of sellers, failed to extend the range. This suggests the up- move will be vulnerable to any selling pressure.

b) On Jan 5 and Jan 6, we had bullish news BUT the buyers failed to extend the range.

c) The close of Jan 3 was 1278 and the weekly close was 1278. In other words, we saw no upward progress after Jan 3 despite the favorable climate.

So in this situation, what do we do?

What’s important is first we recognize both the bullish and bearish signs (rather than taking only that info that supports our view), and second, we identify what we need to see to tell  us the deadlock is broken. We can then plan our responses.

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On another matter - the key coming event for the week. For me the key events this week will be:

1. The Italian debt auction on Friday,  Jan 13;
2. The  ECB rate decision, 7:45 am EST on Thurs, Jan 12; and
3. The BOE announcement on Jan 12 at 7:00 am EST.

Of the 3, I rate the Italian Bond auction as having the greatest probability of moving the market. There is some suggestion of the ECB decreasing rates; but, I rate that a low probability given German comments.

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