NFP Delivers Underwhelming Surprise. What's Next?

Here's what we need to see to confirm a new bullish bias

We may be witnessing a merging of the private sector and anecdotal real world data with government statistics.   This morning’s weaker than expected jobs report confirms what private survey data and what I’ve been seeing in the real world; a weakening U.S. economy.

In recent posts, starting in early April, I’ve been consistently suggesting that a potential bottom in stocks was forming.  On April 29, I wrote: “As I’ve been expecting, a tradeable bottom continues to flourish, as a very oversold market is bouncing off its recent bottom.  Until proven otherwise, the bottom is more likely than not already in place.”

I based my conclusion on the rise in pessimism as exhibited in the CNN Greed/Fear Index, which broke below 40 a few weeks ago, along with the erratic behavior in other traditional sentiment indicators; the CBOE Volatility Index (VIX) and the CBOE Put/Call ratio. 

Specifically, the CNN indicator was at an extreme greed reading while the VIC and the P/C ratio never really gained traction on the bearish side.  In fact, there wasn’t more than concern registered in both of these more tangible sentiment indicators. 

Meanwhile, as I noted in a more recent post, the Fed signaled that it was slowing the rate of QT starting in the month of June.  And as I noted in the post, the net effect of the announcement was that the potential for a liquidity crisis in the bond market would be reduced.  In other words, the Fed was performing a back door/indirect easing of monetary conditions while leaving interest rates unchanged.

In addition, I’ve recently questioned, albeit with some doubt, whether the divergence between anecdotal data, such as when I reported several weeks ago that I was noticing a rise in stress in small businesses and consumers, along with the recent plunge in GDP and the ongoing softness in PMI and ISM data, whether the NFP payroll numbers would eventually catch up to what was already obvious in the real world.

Perhaps what’s most interesting about the NFP data is the slowing in wage growth, which offers a new divergence between the private market data, where surveys across the board suggest that wage pressures are rising.

Looking Ahead

Bearish investors got caught off guard by the NFP data.  As a result, a short squeeze is developing. Short squeezes are often what starts a new up leg in the market.  But before the bulls can declare victory, we need to see more evidence of an all-clear.

The first thing we need to see is a convincing close of the S&P 500 (SPX) above its 50-day moving average.  The index is working on it this morning.

In addition, it would be highly beneficial if the U.S. Ten Year Note yield (TNX) holds below 4.5% over the next few days.  So far so good in the early going this morning.

And last, but not least, a new high on the New York Stock Exchange Advance Decline line (NYAD) would go a long way to reassure investors that a new uptrend is unfolding.

Bottom Line

The Federal Reserve has signaled that lower interest rates are coming at some point over the next few months.  If the economy shows further signs of slowing it will happen sooner rather than later.

Both the bond and stock markets are coming to the same conclusion.

Full confirmation of a new uptrend is still required before an all clear signal.

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