Poor Jobs Report Gives Bulls A Reason To Charge

Last week, we said:

“While the market remains in a very tight range, the ‘money flow’ sell signal (middle panel) is reversing quickly. Importantly, note that the money flows (histogram) are rapidly declining on rallies which is a concern.”

This past week, market action was sloppy as investors are finding fewer reasons to push stocks higher. Friday’s very disappointing jobs report provided some catalyst as the Fed is assured not to reduce monetary support anytime soon. However, despite the push, the overall conviction was lacking.

Notably, the “money flow buy signal” seemed to cross; however, we need some follow-through action on Monday to confirm. As shown, the uptick in money flows did allow us to add some exposure to portfolios in holdings we had taken profits in with the previous “sell” signal. 

Again, we do want to see confirmation that the breakout above the consolidation range can hold. The last breakout failed, so, again, we do need “follow-through” to confirm buyers are indeed back. Notably, the MACD “sell signal” in the lower panel remains, which suggests upside likely remains limited at this juncture. If the “buy signals” align, we will have a much higher level of conviction about higher prices. 

Overall, the market trend remains bullish, so there is no need to be overly defensive. Just a regular process of tweaking risk and managing exposures is all that portfolios require for now. Such is what we have recommended over the last several weeks, so we are now in a position to take advantage of a short-term bullish move. 

For the rest of this week’s message, we will go into deeper detail on the issues I discussed in the latest 3-Minutes” video:

  1. Peak Earnings,
  2. Inflation, and Margins, and
  3. Hedge fund selling.

Peak Earnings?

Over the last few weeks, we have seen numerous companies report stellar earnings growth. Yet, the market has failed to reward the good news as stocks get sold off. As the chart below shows, it has not been just a few select isolated cases. 

There are a couple of reasons for this. 

The first is that earnings guidance has not been “exuberant.” Many companies are starting to express concerns over inflationary costs (including labor) and weaker future demand as stimulus fades. Secondly, the problem with earnings in the near term is that most earnings improvement has come from expanding net margins. 

That massive boost to net margins came from the economic shutdown. With reduced workforces, a shift to lower-cost “work-from-home,” and increases in productivity through technology, the surge in margins is not surprising. However, as the economy “reopens,” that tailwind to earnings will fade quickly. The rise of inflationary inputs, increased employment, and potentially higher taxes will shrink net margins dramatically in the quarters to come. 

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