Are we in the bad news for Main Street equals good news for Wall Street phase? One jobs report with revisions lower, less than forecasted jobs, and the market catches fire. Just like that inflation – gone, war in Israel – old news…
The concerns of yesterday are replaced with the hope of an economic slowdown, a so-called soft-landing R word. Jobs are considered a lagging indicator. Companies tend to be slow to hire coming out of recession and slow to let employees go at the beginning of an economic downturn.
When the number of jobs created slows, accompanied by adjustments lower to prior results, Wall Street sees the potential for the economy to stall.
You might be wondering why bad news for the regular Joe and Jane is good news for the starched shirt types on Wall Street. The standard policy prescriptions are more federal government spending and the Federal Reserve lowering rates. And that’s the key, Jerome Powell and company reducing the cost of money.
All that easy money floating around usually finds its way to investments with stocks and bonds being among the biggest beneficiaries.
It’s been our experience that when good news equals bad news transition corresponds with a market transition from down to up. However, the NASDAQ still has some work to do before we can put down a marker and say the philosophical transition is also a pivot point.
As you’ll see on the chart below, the race higher halted as the index hit the top edge of its descending trading range. That means the trend remains intact. Along with breaking the trend, we also want to see profit taking that stops and pivots higher than last week’s low of around 12,600.
Three things we want to see… profit taking, higher cycle low, and then a trend break to a new cycle high, starting the process of walking up the stairs instead of down. Until then, investors need to trust the trend remains intact despite the emergence of bad news equals good news.
It is positive that Invesco QQQ Trust (QQQ) outperformed SPDR S&P 500 ETF Trust (SPY). That’s to be expected in a week where the markets jump close to 5 percent. But what’s interesting is that we’d expect to find technology dominating the top of our sector/industry performance leaderboard.
That didn’t happen, although ARK Next Generation Internet ETF (ARKW) was the number one gainer on the week. A lot of interest rate sensitive exchange-traded sector/industry funds (ETFs) like homebuilders and banks made it to the top as well. That confirms our thesis above that Wall Street expects a shift in policy from the Federal Reserve.
We are prepared to add an industry/sector ETF as soon as we get something close to the three-step process outlined above.
Same here, once we start walking up the stairs, then we’ll have some ideas here.