By NAAIM Member Dave Moenning, Daily State of The Markets
Good morning. Given all the excitement we’ve seen this week, I personally find it remarkable that this is only the fifth trading day of 2016! And after the worst 4-day start to a new calendar year ever, it looks like today is going to be another wild one. Only this time, it looks like the screens could have some green on them for a change. (Well, in the early going anyway.)
There are really three issues to deal with on this fine Friday morning. First, there is China. Second, there is China. And third, there is the U.S. jobs report.
After what appears to have been a misguided move, Chinese regulators pulled their brand new circuit breaker system yesterday. Yep, that’s right; after four days, two early halts to trading, and two declines of 7% or more, the market regulators decided they had seen enough and pulled the plug on the new system.
Instead of shiny new trading halt system, officials instead turned to the old playbook – government intervention. And voila, both the Shanghai composite and the CSI 300 put up gains of about 2%.
In other words, reports indicated that state-controlled funds were busy buying equities on the Chinese markets for the second time this week. So, the game plan appears to be whenever stocks aren’t going the direction officials would like, the government comes in and starts buying with both hands.
Now let’s move on to the yuan. To review, the concern is that continued depreciation of the Chinese currency could unleash a wave of deflationary pressure across global markets/economy.
The good news this morning is the PBoC fixed the rate higher for first time in nine days. In addition, there were reports of central bank intervention in both onshore and offshore markets for the yuan as well as other manipulative measures. So for today anyway, the yuan does not appear to be a problem.
Here At Home
One of the primary bullish arguments heard during the chaos this week is the idea that the current panic in global stock markets is not specific to the United States. Our heroes in horns tell us that it is only the contagion risk that is in play for U.S investors.
While this can, and likely will, be an ongoing “discussion” in the markets, today’s jobs report is being cited as exhibit A in the bull case.
The government reported that the U.S. created 292,000 new jobs in December, which was well above the consensus expectation for 175,000-200,000 as well as last month’s upwardly revised reading of 252K.
On the unemployment front, the rate came in unchanged from last month at 5.0%, which was in line with expectations.
There were also revisions to the new job totals for both October and November, which meant there were actually 50K more jobs created than previously thought.
In sum, the jobs report was strong and a pleasant surprise – and should help support the bull camp’s stance that investors should ignore China and focus on the good things happening here at home.
So, in a market that had become extremely oversold on both the short- and intermediate-term time frames, the combination of good news in the U.S. and stability in China means that stocks are “set up” to rebound. The questions, of course, include (a) whether or not the bounce will stick for more than a day or two and (b) how far can the bulls push stocks here?
S&P 500 – Daily
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The chart above illustrates the logical near-term resistance zones/targets for an oversold bounce. However, one thing we know for sure is that the algos tend to overshoot in both directions. And then with some short-covering added in, there is really no telling how far prices could run – IF the bulls can control the day.
Publishing Schedule For 2016: With my Chief Investment Officer gig at Sowell Management Services (a registered investment advisor responsible for north of $600 million in client assets) comes a myriad of tasks and responsibilities, as well as frequent writing assignments, speaking engagements, video recordings, advisor calls/meetings, and industry presentations. Because of this, the time available to pen a “daily” missive is becoming more elusive (and nearly impossible when I’m on the road). And since my primary duty is to keep our investing strategies up to snuff and on the right path (or “out of the ditch” as William Sowell likes to say), my plan for the upcoming year is to publish my oftentimes meandering morning market missive two to three times a week – or when market circumstances dictate. For most, this will likely be a more appropriate diet of “Daily State” reports! But since there are loyal readers that will check in to make sure everything is okay in my world if I miss a day, I thought it would be best to publish my intentions for the “State of the Market” reports in 2016. Finally, I’d like to say thank you to all those who make this report a part of their morning routine. It is my sincere hope that readers will continue to find these reports helpful in some small way.