TSP Talk Blog

Stocks rallied again as the move off the March lows gets even more frothy than it has been. Today's action may be attributed a much better than expected ADP employment report which saw 2.76 million people losing their jobs in May - a prelude to Friday's non-farm payroll jobs report. The reason for the rally is that expectations were looking for 9 million or more to be added to that list, so it was a much better number than anticipated. The Dow jumped 527-points,and we're feeling some euphoria in the air.

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If we go back to early March when the February jobs report was released and 273,000 jobs were added during the month, and in January 225,000 were added, and on both of those jobs report days the stock market reacted with big sell-offs. Now we're seeing millions of jobs lost each month and, well, you know.

Is it a technical rally? A bear market rally? A reversal of the pandemic bear market? Emotional? Are we at euphoria on the Cycle of Emotions Chart? I last posted this chart on March 9 and we were wondering where we were then. Were we at the Fear level? Was it Panic yet? Capitulation? Despondency?




This is what was happening on March 9. It felt really bad at the time, but as we have witnessed repeatedly, especially this year, the market tends to move a lot further than we'd expect before it changes.




And here's what happened afterward, so there was a lot more fear to pull out of investors on March 9, another 500 - 600 S&P 500 points, before the bottom was reached.




Now, we have a different issue. The rally off the lows has pushed the indices back toward the old highs. As we have said before, the data has improved, but it is nowhere near where it was at the February highs, yet the market wants to get back to those levels.




At what point does this rally become "euphoric?" We're almost certainly past the optimism stage on that chart and into thrill and excitement. Nobody is going to ring a bell when we get there. The question is whether investors will have time to step aside when it's over, or if they will be caught again like they were in March?

Not that we'll get a March-like sell-off again. That's very unlikely. But dips, pullbacks, and /or corrections are likely coming at some point.

We talk about the smart and dumb money when in comes to investors, and while it's clear that the dumb money has enjoyed this rise, the smart money tends to know that days like Wednesdays are good days to sell, not chase. But again, the line between smart and dumb money has been pretty fuzzy lately. It feels like everyone is jumping on this one. It's likely only going take a small pin prick to pop the balloon, which it stretching pretty thin. Perhaps the old highs are the target, but in my mind, with the S&P 500 trading at a P/E of near 24, those valuations make no sense in this environment.

The May jobs report comes out on Friday and estimates are looking for a loss of 8.5 million jobs, and an unemployment rate of about 20%. Yesterday's ADP report may have brought investors' guard down, in my opinion.

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The S&P 500 (C-fund) has been going virtually straight up since the March lows. Clearly it is trying to correct what was now obviously an overreaction on the downside, because now that we are getting the horrible data from the economic shutdown, investors are still buying. The question I keep asking is what is the justification for prices to go back to where they were before the virus shut down the economy? Almost nothing in the economy is working at full capacity, at least compared to where we were in February, so how can the prices be the same? It seems irrational but it also tells us why trend trading is very popular, where you just stay with a trend until it breaks. But you can see what happens when they do break.




The Dow Transportation Index is just getting to its 200-day EMA and there is other resistance in the area, but do these momentum and trend traders care?




The dollar was down again yesterday and that trend has been most two weeks of straight down action, and obviously huge losses since that spike up in March. But again, when the trend breaks it can be quick, so don't blink if you're riding these waves. There is an open gap down by 25.75 that could be a downside target.




The much better than expected ADP employment report sent yields sharply higher, and in turn that pushed bond prices lower. The BND (F-fund) closed at 87.55, just above 87.50, the area we talked about on Tuesday as a level that could be troublesome for bonds if it doesn't hold.




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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley


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