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TSP Talk: Big jobs report confuses investors

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Stocks recovered from an early sell-off after the release of the July jobs report on Friday morning. The report saw a gain of 528,000 jobs or more than doubled the estimates, and it shook up the economic picture as the country debates whether or not the economy is in a recession. The indices closed near the highs of the day after the morning decline, but in this environment with the Fed trying to fight inflation, is a giant beat in the jobs data really what the stock market wants to see? The Dow gained 77-points and small caps had a big day, but some selling in big tech took the S&P and Nasdaq down on the day. Bonds were crushed as yield spiked on the strong data.

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The jobs report was likely an anomaly but it is what it is and investors have to react and position themselves for it. The Fed is trying desperately to control inflation which "should" be weighing on the economy, so that big jobs report certainly questions whether they are doing enough. They want to see the jobs market weaken in order to slow inflation. So is the economy hot or is it weakening? That is obviously a big question and how investors allocate their accounts depends on the answer to that question.

The 10-year Treasury yield spiked on the strong jobs report on Friday and technically it moved back above the neckline of the head and shoulders pattern while it once again attempted to fill that open gap near 2.9%. Yields generally go up when the economic data is strengthening, or the Fed is doing something that will trigger such. The Fed is raising rates and the jobs report only strengthens that resolve, but raising interest rates should serve to slow the economic growth, so which way should yields go? The trend has been down since the early June peak, and unless we see a yield above 2.9%, that trend will continue.

BND (Bonds / F-fund) gapped down on the strong data and the spike in yields. It did fall below a rising trading channel (blue) and now will rely on the 50-day EMA for support if the recent rally in bonds is going to continue. I know bonds are boring but their movement actually tells us a lot.

The dollar found some support last week after successfully testing the 50-day EMA and rebounding, and it broke above its short-term descending resistance line which, if you see the pattern between it and the S&P 500, could mean there's a roadblock in the way for the recent rally in stocks.

The S&P 500 chart is also suggesting some double top resistance but you can see that breakouts to the upside have turned into fake outs repeatedly this year. Does that mean we will see more upside to start the week to get mom and pop to jump on the rally and trigger another fake out?

We will get the next CPI report (consumer prices) on Wednesday and this could be a bigger report than the jobs report as far as how much it might impact the Fed's interest rate policy. But with the next FOMC meeting not scheduled until the latter half of September, the market and investors will have to interpret this data, along with the Friday's big jobs report, for 6 more weeks before that meeting and decision on rates, unless the Fed does some kind of emergency move in rates in the interim. How big would that be?

The S&P 500 (C-fund) is testing some overhead resistance, but as I mention in the chart up above, there is a tendency to see a fake out move before any pullback, just to keep us guessing, and probably get many of us leaning the wrong way. We shall see if Friday's strong jobs report was the catalyst the market needed to get above resistance, or if it was the news that the entire rally has been based on - in other words, buy the rumor, sell the news? It's all about the Fed at this point and interest rate hikes and quantitative tightening are not generally a good recipe for the market.

The weekly chart shows the recent rally off of the 200-week average, which looked so clean and now looks obvious, but here it is now running into the 50-week moving average. Will a pullback from that resistance look obvious to us in a couple of weeks, or can this actually continue above resistance?

The DWCPF (S-fund) fell below that small rising wedge pattern but reversed to close back inside it, and also with a gain after the top of its bear flag held as support. Very interesting. Rising interest rates are not usually good at all to small caps, so this positive action was very interesting.

The EFA (I-fund) lagged badly and of course that had a lot to do with the 0.85% rally in the dollar on Friday. Lots of resistance in the area, and maybe it is too obvious. As I mentioned above, fake outs tend to come out of these kind of patterns to try to get us leaning the wrong way.

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

Tom Crowley

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