It’s amazing how worked up everyone gets on the eve and morning of the non-farm payrolls report.  This morning, the number was reported as 200,000 jobs created in December versus an expectation of 155,000.  The prior month’s report of 120,000 was revised down to 100,000.  Immediately, the equity futures jumped on the news and slowly began to give back those temporary gains.  Within an hour of trading, the Dow Jones was down over 70 points.  Below is a picture of the non-farm payrolls number over the last several months.

There is speculation that the reason the stock market didn’t react more favorably to the jobs report was because a better jobs picture potentially takes QE3 off the table.  In a normal market (which we haven’t had for some time), when there is good economic data, the stock market typically sells off.  This is because it potentially removes the Federal Reserve as a stimulant to stocks.  If the economy is healthy, there is no need for the Fed to be accommodative (low interest rates).  Higher rates are generally bad for stocks.  Higher rates mean consumers have to pay more to borrow money and don’t have more in their pocket to spend.  Hence, companies’ profits decline.  In addition, many investors buy stocks on margin and if rates are higher to borrow money, there won’t be as much demand for stocks.  Therefore, when rates are rising, equities struggle. 

Starting in 2008, that all changed.  Because the news and financial situation was so bad, any good news that was reported helped equity prices to rise.  The Fed started its quantitative easing (versions 1 & 2) and good economic news was actually good news for the stock market.  Perhaps today the market is telling us that good economic news will actually be bad for the stock market.  What happens if the punch bowl is taken away?  What happens if the Fed isn’t there injecting capital and supporting this economy?  What happens if there is no QE3 (quantitative easing version 3)?  Let the pity party begin.  As you know from my podcasts, I don’t believe the economy is as good as some of the backwards looking numbers would lead you to believe.  There are several reasons for this.  First, there is a lot of seasonal hiring which is temporary.  Secondly, many have simply left the workforce and aren’t counted in the numbers.  Thirdly, many of the reports being analyzed are looking in the rear view mirror.  I hope for our country’s sake that the economy does improve.  However, by looking at several forward looking indicators, I don’t see the improvement currently.

We can speculate all day long about why markets go up and down on an hourly basis.  However, the secret is to realize it goes up because more people are buying and it goes down because more people are selling.  It’s that simple.  First of all, overbought and oversold markets trump the news items.  The media will rack their brains trying to figure out why the market is going down when the jobs number was supposedly good.  For the last several days, the stock market has been overbought, simply meaning it needed to take a rest or temporarily stop rising.  This doesn’t necessarily help us with the direction over the next few months.  However, it does tell us that if we want to buy a lot of stocks at a low risk time, we’ll get a better chance to do that at a later point.  That’s what overbought means. For the time being, the investments I remain long in are those that are working.  But, I’m afraid they will end up being rentals, not long-term investments.

Initial Jobless Claims were reported this morning for the week ending December 24^th.  The number came in at 381k versus an estimate of 375k, a slight disappointment.  This follows a few weeks of positive surprises.  On the surface, this appears to be good news that the initial jobless claims are heading in the right direction (down) when you look at the recent trend.  However, all of you, because of your vast knowledge, know these government numbers aren’t as rosy as they first appear.  Every week, more and more Americans are simply walking away from their less than desirable jobs and simply stopped looking for new ones.  Therefore, they aren’t counted in the numbers.  This is why we’ve seen the unemployment rate fall in recent weeks.  Put on your math cap for a moment.  Last month, the unemployment rate was reported to be 8.60%, down from a high in late 2009 of 10.1%.  In November, those that aren’t in the labor force rose by 487,000, a very large number.  Remember, if you aren’t in the labor force, you aren’t counted as unemployed.  If those same people didn’t drop out of the labor force, the unemployment rate would be over 11% at this point.  Numerators and denominators folks.

Regardless of the hocus pocus with the government numbers, the bottom line is that the correlation between the initial jobless claims number and the S&P 500 is still quite high.  Perhaps there are more people who don’t understand this concept than those that do.  Or, is it the positive spin the media puts on the initial jobless claims number when it’s reported?  Regardless, we must respect this correlation. 

The chart above shows the initial jobless claims inverted versus the S&P 500.  The higher the red line, the lower the jobless people (allegedly).  The blue line is simply the S&P 500.  Since 2007, it’s been a very tight correlation.  Prior to 2007, the correlation was high but it was more about the direction over several months.  I do want to point out the years 2001 and 2002.  Notice that the initial jobless claims number was falling (red line rising) in late 2001.  The stock market was rallying with it.  However, even as the initial jobless claims continued to fall in 2002, the stock market fell over 30%. 

While we should respect this correlation, one must never forget correlations break down at times and that breakdown can be extremely costly to investors (i.e. gold). 

I’ll continue to update this picture over the coming months.

In the last few days, gold has stolen the headlines from Europe, or at least its sharing some face time.  For several months, the common thought was that gold would have to go up because of all the money printing and real interest rates staying below zero.  This was certainly true until the August timeframe.  Gold was making new highs on a daily basis, until the Swiss Franc became pegged to the Euro.  At that point, gold began trading on its own.  In addition, as fear spiked, money began pouring into the U.S. dollar.  One has to look no further back than 2008 to see what happens to correlations in a crisis.  In 2008, the global economy and banking system was under some serious stress.  Treasuries rallied and the U.S. dollar rallied.  Fast forward to 2011.  The same thing is happening.

So, it should not be a major shock that gold is under some pressure.  Especially because there hans’t been a bazooka approach to solving the European debt crisis…yet.  So, equity investors and commodity investors are throwing a pitty party.  More stimulus!  That’s the battle cry.  From a technical perspective, I thought it had a good chance of breaking out of the recent pennant to higher prices but I waited to get that confirmation before buying.  That confirmation never came.  Therefore, I never bought it.

The big question is whether or not the bull run for gold is over?  I don’t think it is.  I think gold was an easy place to hide out in the last few years and every once in a while the bulls must be shaken out.  Those that took their IRA and bought gold because a celebrity on television was pushing it are now second guessing that move.  In 2008, gold had a 30%+ downside move before returning to the long-term bull market.  I think this current move will be no different.  If you notice from the chart below, I have circled the RSI breaking 50 in 2008 which led to the almost one year drop in gold represented by the SPDR Gold Trust (GLD).  In addition, gold broke its 50-week moving average.

(CLICK TO ENLARGE)

 The same thing is currently happening in the gold market.  The RSI is below 50 and the 50-week moving average has been violated.  More downside is to come in gold with a lot more volatility than we’ve seen in the last three years.  But, that doesn’t mean the gold bull market is over.  In the very short-term, gold is getting very oversold and is due for a bounce.  But, if you’ve been wanting to establish a long gold position for an investment, this isn’t the time in my humble opinion.

Right after the bell opened this morning for the U.S. stock market, there was a major spike in oil.  Oil shot up from $98.50 to over $101.00 in just a few minutes.  Reports started circulating that Iran had closed the Strait of Hormuz. 

CLICK TO ENLARGE

The Strait of Hormuz is a waterway in between the Gulf of Oman and the Persian Gulf.  It’s a critical area of the world because this is where a big chunk of the world’s oil shipments travel.  The strait is 34 miles wide at its narrowest point.

Source:  Wikipedia.org

Iran was reportedly holding some type of military training and planned on closing the Strait.  However, Bloomberg reported that the Strait is wide open and the rumor never originated.  Even though oil gave back some of the gains, it’s still elevated on the day.  A persistently high oil price definitely wouldn’t be good on the already fragile global economy.