How to Turn Frowns into Profits
I politely refer to this market as “data obsessed.”
But it’s more than that.
It’s an addiction.
One no different than nicotine, Diet Coke, or rhinotillexomania. And it can be just as harmful.
But investors can’t shoulder all the blame for this condition. The environment in which they live shares part of the responsibility. And that’s because the Federal Reserve is currently obsessed with data.
The U.S. central bank is trying to wrestle inflation back down to 2%. To do so, it’s implemented the most aggressive series of rate hikes in decades. And it won’t stop until there’s evidence that these rate hikes are beating inflation into submission.
That means, every data release from the government is essential to the outlook on rate hikes.
Not only that, it makes every data release from the government the most important one to watch… until the next one.
So, today we’re going to delve into the only data release to watch this week. It hits the wire mere hours from now.
But don’t worry, there’s still enough time to prepare.
Better yet, I’m going to reveal how you don’t even need to catch the initial response to the report to profit over the next several weeks.
The Rocky Balboa Economy
Fed Chair Jerome Powell spent two days testifying in front of Congress this week.
He answered question that sometimes felt obviously written by members of the elected officials’ staff. But regardless, the markets didn’t like what he had to say.
“Rates will be higher than expected … blah, blah, blah … elevated rates for an extended period of time … blah, blah, blah …”
Now, not much of this tune is new. This song has been on repeat for months.
Investors just believed the Fed were liars or at the very least, guilty of incompetence. They took that old Wall Street adage, “Don’t fight the Fed” and chucked it right out the window.
They exclaimed, “No, we’re fighting this one!”
The Fed said, “Rates are going to 5.25% to 5.5%...”
Investors replied, “You don’t have the guts to raise rates above 5%...”
Unfortunately, the data continues to show the U.S. is the Rocky Balboa of global economies. The Russians, Clubber Lang, a global pandemic, or even the Fed can’t knock it off its feet.
It’s remained stubbornly resilient. Inflation refuses to cool, consumers are still spending and businesses are still hiring as the U.S. unemployment rate slipped to the lowest level since Neil Armstrong planted his foot on the face of the Moon.
This is the exact opposite of what the Fed wants to see. And now there’s panic that the Fed was right, and everyone feels dumb.
The hope of a 25-basis point (bps) rate hike in March is dwindling. Meanwhile, the prospect for a 50 bps has surged with rate increases now stretching until at least May.
Of course, nothing is set in stone.
And, before the next rate hike decision on March 22, we have a few essential government data releases.
We could argue that they’re the most pivotal data releases to date.
And the first one takes place tomorrow at 8:30 AM ET.
Alternating Emotions
On the first Friday of every month, non-farm payrolls are released.
Since the Fed is laser-focused on the labor market (since increasing unemployment and slowing wage growth are the fastest route to bringing down inflation), investors have turned the monthly jobs report into a maelstrom of activity.
Over the last 9 non-farm payroll reports the Invesco QQQ Trust (QQQ) has averaged one-day moves +/- 1.69%.
That means the QQQ has moved up or down 1.69% on this jobs data release.
Really take a moment to appreciate that chart…
There have only been two jobs days where the QQQ didn’t end the day up or down more than 1%. And keep mind, this chart is just end of day total. It doesn’t include the intraday chaos.
So, we can expect a significant move tomorrow.
But that’s only half the story here...
Hope You Like Roller Coasters
I’ve discovered the implications here are much longer. And the most significant aspect of the non-farms payroll report is that it has set the stage for the next 30 days in the markets.
So, your crystal ball is no longer a ball… it’s a smile or a frown.
Let me show you what I mean.
On this chart, I’ve placed either a frowny face or a smiley face on the non-farm payroll releases since October. They correlate with the one-day moves on the QQQ in the chart above.
For instance, the frowny faces on October 7, December 2, and February 3 indicate that the QQQ fell on that day. The jobs data made investors sad.
The smiley faces are on the November 4 and January 6 releases. Investors were happy with the data.
But what’s important, look what happens to the market after each instance. The emotion felt on jobs day didn’t end there. It carried until the next non-farms payroll release a month later.
On October 7, the QQQ fell 1.69% on the jobs data release. It then set new 52-week lows on October 13. There was a brief bounce, but the QQQ ended up falling another 3.2% from October 7 to November 3.
Then, on November 4, the QQQ rallied 1.93% on non-farm payrolls. And that bright mood tacked on another 11% from there all the way to December 1.
But all good things must come to an end. And on December 2, the QQQ dropped 1.76% on jobs data. The negativity didn’t stop there. And the QQQ then fell another 10.4% by January 5.
Back to a smiley face on January 6. The QQQ rocketed 2.76% on non-farm payrolls. And this rocket ship was going to the moon – at least it felt like it then – and the ETF gained another 16% by February 2.
But the inevitable crash happened. And on February 2, the QQQ dropped 1.76% on the monthly jobs data. And guess what… its hasn’t stopped falling since.
That’s because the trend seen the jobs data is then echoed in Consumer Price Index, as well as Producer Price Index data. And that emotion continues on to the release of Fed minutes each month, until we find ourselves back at non-farm payrolls once again.
It’s all part of the current data addiction cycle. And if you don’t like roller coasters you haven’t been having much fun.
But if this trend remains intact, the reaction we see tomorrow morning at 8:30 AM ET to the non-farm payroll release could tell us where the markets are heading for the next several weeks. And that allows us to buy puts or calls accordingly… turning a potential frown upside down into profits.
Your weekly data dealer,
Matthew
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This market commentary is opinion and for entertainment purposes only. The views and insights shared by the author are based on his many years of experience covering the markets. But they are subject to change without notice and opinions may become outdated. And there is no obligation by the author to update any information if these opinions become outdated. The information provided is obtained from sources believed to be reliable. But the author cannot guarantee its accuracy. Nothing in this email should be considered personalized investment advice. Investments should be made after consulting your financial advisor and after reviewing the financial statements of the company or companies in question.