The “New Year” Starts With A Rally

 

Last week, I discussed the potential for a rally as we head into the New Year based on both the more extreme levels of short-term oversold conditions coupled with the statistical tendencies going back to 1990. To wit:

“Interestingly, the market retraced exactly 38.2% of the previous decline and failed at important overhead support…it is critically important the markets muster a rally, otherwise, we are most likely looking at a retest of recent lows at a minimum, or new lows at the worst.

While I still expect a rally which could potentially reach 2650-2700, the overall market environment remains negative which, for longer-term investors, continues to favor higher levels of cash and fixed income.”

 

Well, on Monday, Jerome Powell, who was speaking on a panel with Janet Yellen and Ben Bernanke, said the Central-Bank’s policy is flexible and officials are “listening carefully” to the financial markets. Critically, for traders worried about shrinking liquidity in the economy, Powell also signaled a willingness to consider changes to the Fed’s gradual run-off of its balance-sheet in any policy review.

That statement led to a flurry of buying activity which reversed all of Thursday’s rout which was driven by a collapse in the ISM Manufacturing Report and a severe economic warning coming from Apple (AAPL). 

While, at this point, the risk/reward for traders remains on the “bullish” side, the economic warnings from Fed Ex (FDX), Apple (AAPL), and the economic surveys should not be dismissed. 

But what about that surging jobs report?

On Friday, the employment report showed an increase of 312,000. While that was indeed a good number, such doesn’t mean much within the context of the overall employment trend. More importantly, employment ALWAYS tends to spike up just before the onset of a recession as employment is a lagging indicator of the overall economic cycle. 

Here is another way to look at it. 

While employment ticked up, so did wages which directly impacts corporate profit margins. Not surprisingly, wage increases are a late-economic indicator and precede the onset of recessionary environments.

While Larry Kudlow was quick to jump on “the Twitter” and proclaim “no recession in sight,” I would suggest the recent components of the report likely suggests one in closer than most think. 

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Real Investment Advice is expressly disclaims all liability ...

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