August 26, 2016 was Janet Yellen’s day at Jackson Hole, Wyoming for the annual gabfest over economic policy. This year the focus was on interest rates (or at least that is all the pundits and economists cared about). Right off the bat though, Janet noted how the “US economy (was) now nearing the Federal Reserve’s statutory goals of maximum employment".

Naturally we couldn’t help but question that, as the current rate of unemployment at 4.9%, has largely been accomplished because more and more people are no longer considered to be a part of the labor force, and labor force participation rate keeps falling. Lower the labor force participation and you automatically also lower the unemployment rate.

All things being equal, the unemployment rate should be 9.5% if the labor force participation rate were 66%, as it was consistently prior to the 2008 financial crisis. Today it’s 62.8%. We go on to cover the disparity between the 1% and the rest, the low PCE inflation rate that the Fed focuses on, the declining GDP, years of falling interest rates encouraging huge borrowings, the growth of the monetary base and the interrelationship between debt and the stock market. The Fed will hike interest rates if the data supports it. Otherwise they won’t hike interest rates. But the market seems to believe they will.

Weekly Market Review - Stocks

The stock market appears to have run out of traction. Momentum is fading, and roll-over patterns are beginning to develop. What hasn’t happened, of course, is that the market has not as yet broken to the downside. Volume is not confirming the recent run-up to new all-time highs. Market watchers need to focus on a break of key points that could give clues that a corrective move is on its way. It’s overdue. International exchanges have not confirmed the new highs seen by a number of US exchanges, as most remain well off their former highs that were seen, in some cases, as far back as 2014.

Note: The volatile US nonfarm payroll and employment numbers came out Friday, September 2, 2016 at 8:30 AM. Nonfarm payrolls were expected to be anywhere from 180,000 to 200,000 for August. July was up 255,000. Watch for revisions. The unemployment rate was expected to be unchanged at 4.9%. 

Currencies

This week we focus on the trade-weighted US$ Index and its sister, the real trade-weighted US$ Index. The market focuses on the US$ Index, which is heavily weighted towards the euro and only focuses on six currencies. The trade-weighted US$ Index is a broad basket of currencies of countries the US has trade relations with. It encompasses some 26 different currencies weighted more to trade with the US. The Fed focuses on the trade-weighted US$ Index, whereas the market focuses on the US$ Index. The US$ Index remains caught between recent highs and lows with the recent move being to the upside, as the market focuses on the belief that the Fed might hike interest rates.

Gold and Precious Metals

Gold’s downward correction continues. While we cut off our numbers as of close on August 30, 2016, we can’t help but notice that gold appears to now be attempting to break under $1,310, a potential breakdown zone that could see gold fall to $1,250. Given that gold is somewhat oversold, and the gold stocks especially are oversold, at least on a short-term basis, there is potential for a false break to the downside.

Under $1,300 would give more clarification. We use the current weakness to look at gold’s cycles once again, from the very long to some shorter-term cycles. We have surmised that gold may be falling into an 11-month cycle low, and explain how we arrive at that conclusion. August 2016 has proven to be the first August in seven years that is going to see gold close down.

So far, the seasonals are off a bit as the market rallied during a normally weak period in June and July and is down in August, normally a strong period. Seasonal strength may return in September, but the market really needs to regain and take out $1,360. The bullish sentiment that was prevalent earlier has somewhat dissipated, but remains higher than where bullish sentiment has been over the past several years. But then that was seen primarily through a bear market.

Our conclusion is that gold has not yet confirmed the December 2015 low, even though we have taken out levels to the upside that haven’t been seen since the last bull market of 2008 to 2011. However, gold’s fundamentals remain strong as a safe haven and hedge against currency gyrations, government actions, the potential for credit defaults (both sovereign and corporate) and ongoing dysfunctional politics, among others. 

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