Stocks sold-off Friday after a weaker than expected jobs report.  Is the economy really in trouble? Was the surprisingly weak jobs report ( a loss of 4000 jobs in August) an indication that we could be facing a recession? 

The first problem I have, and I have said this before, is how accurate is this number?  Upon the release of the June report on the first Friday in July, the market was up modestly after it was announced that 132,000 were created in June.  This past Friday they revised that number to 69,000.

On the first Friday in August the release of the July jobs report saw the Dow drop nearly 300 points after it was announced that 92,000 jobs were created.  The Dow gained back all of those losses the following Monday.  This past Friday they revised that number to 68,000.

Estimates for the August report were in the +110,000 area.  It came in at a loss of 4000 jobs.  That it a major miss and the first negative number in a few years.  But how much can we trust this number?  Was it really a 50,000 drop, or maybe a 75,000 gain?  We'll find out next month I guess when they revise it.

The upside to this recessionary report is that the Fed is almost certainly going to cut rates at or before the September 18 FOMC meeting.  If they do not cut by that date, I wouldn't want to be in the stock funds that day.

So the current "V" bottom in the S&P 500 (or you could call it a "Y" bottom with that washout reversal day in August) is now in jeopardy.  Will we get a test of those August lows and see a "W" bottom?

That's very possible, but the fact that the August low was such a washout, I am thinking that a test or no test, that low should hold.  In 1998, a year we have used as a comparison for the current market environment, saw a double bottom "W" formation, but the "washout" (or kangaroo tail) was on the test, not the original low.

The Yen/dollar conversion rate dropped below 113 this weekend and as I write this is sitting near 113.20.  We have been watching the 114 area as a level that must hold or we could see an unwinding of the carry trade.  I won't even attempt to explain this to you since I don't completely understand it myself, but people much smarter than me told me to watch that 114 area as possible trouble for U.S. stocks, and we have now broken below it pretty convincingly. 

The dollar index moved below 80.  The old Tony Orlando and Dawn hit that said "Knock three times - on the ceiling if you want me", tells us the third knock on the floor has the same affect.  It tested 80 and when a bottom (or top) is tested a third time, it tends to break.


                                 Charts provided courtesy of www.decisionpoint.com

A weak dollar has a positive effect on the I-fund.  As the odds of a Fed rate cut increase, so do the odds of a lower dollar increase.

Our TSP Talk Sentiment Survey System moved to a buy signal and 100% S-fund for this week. The recent 45% bulls to 37% bears reading, or 1.22 to bulls to bears ratio was just enough to move it below the 1.25 buy signal. 

The EbbChart System is in the S-fund today (or I-fund if you missed the late update Friday) after again missing last week's big losses.  If you did miss the late update, please don't freak out (and some of you did).  You are still 100% in a stock fund and that is what is important if you are following this system closely.  The alternative of course, is for us to not report any late updates, but it doesn't make sense to not pass along information if it is available.  Some will get it and some of course won't.  Late changes will be rare but they could happen.  Your best bet is to check out the EbbChart page each morning if possible, as close to the 12 noon ET transfer deadline to see if there has been a rare late change.

I uploaded Trader Fred's TSP Trader System commentary but I haven't even had a chance to go over all of the new information he provided today.  I will do that as soon as I am done here.  I do know the system is still in the F-fund, which has performed exceptionally well lately, and the system is now up 10.5% in 2007, which is more the 4 times the 2.5% return of the S&P 500.  Not bad considering the system has been out of the stock funds more than 50% of the time this year.  I'll have to calculate that as it could be closer to 65% of the time.

You may have seen that I used Friday's weakness to move to a 100% stock allocation for today.  We could get a bounce, particularly if the Fed does step in and cut rates after the exceptionally weak jobs report.  I know fear and worry are good signs that the market could be ready to rally, but I will remain nimble in this volatile environment just in case.  Like I said, if the Fed does not cut rates by next week, I may have to abandon my "we've seen the bottom" theory.

That's all for today.  Starting today I am 25% C, 50% S and 25% I-fund.  But that could change any day this week.  See you back here tomorrow.

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