May 6, 2016, Weekly Summary: Don’t Let the Headline Job Numbers Fool You When it Comes to Interest Rate Hikes

Don’t Let the Headline Job Numbers Fool You When it Comes to Interest Rate Hikes

Last week we pointed out that the S&P 500 seemed to be forming a near-term top.  Part of our reasoning comes from the fact that over the last two years there have been seven near-term tops that formed on the S&P.  In all seven cases, there was a spike-up in the Bull Sentiment (pink arrows), and a spike-down in the Bear sentiment (Blue arrows) which preceded the tops themselves by between one and six weeks.  Also in every case, the Bull Sentiment went down (pink circle), and the Bear Sentiment went up (blue circle) at the S&P maxima.  The graph below shows how the recent high from two weeks ago (blue rectangle) fits as a near-term top.

The Rydex Assets are also signaling a topping pattern that confirms the Bull and Bear Sentiment signal (see the chart below). There is still, however, a serious possibility that the 2100 level will be retested before the downtrend continues.  The fact that the S&P managed to close above the unchanged mark for the year and its 50 sma/ema, tells us that there is still some buying left, although not enough to make new all-time highs.

Earlier in the week, we sent out the following graph because it demonstrates the probability that the S&P has reached a more substantial, longer-term top.  Notice that the RSI dropped bellow 30 in 2001, 2008, at the end of 2015.  Notice also how the MACD crossed-over each time, and the earnings started to drop. What is significant is that the S&P 500 fell 27% in 2001, and 46% in 2008 following both RSI breaches of the 30 level. Of course this does not HAVE to repeat itself, but the odds are firmly pointing in the that direction.

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Gold

The Dollar managed to stay above the technically important 92.50 level, causing gold to drop in price four out of the five days this week.  Gold did rally on Friday, following what was widely regarded as disappointing job numbers: nonfarm payrolls increased by 160,000 (below the consensus of 200, 000).  This, and the drop in the participation rate to 62.8% from 63.0%, convinced the gold market that the FED was definitely NOT going to raise rates anytime soon and so the party resumed.  Even so, gold was unable to recover the $1300 level, and closed down for the week.

Even though the job numbers printed lower than was expected, it seems to us that more attention should be paid to wage growth, which came in at 2.5% year over year.  For the last five years, average hourly earnings growth has been more or less flat, averaging 2.1% year-over-year, but has averaged 2.5% since last December.

This is more important than most people realize since increased wages should lead to;

• More consumer spending
• More business profits
• More tax revenues
• Less government borrowing
• Positive data for the FED to use as justification for a rate hike

That last point, will have a positive effect on the Dollar, and a negative effect on the price of gold in the next few months.  We doubt that the FED will raise rates in June, but it could raise as early as July.

This week, gold started to trade divergently with the 30-year bond (pink circles on the chart below) which leaves the door open to a change in direction and, therefore, more upside. But since the divergence has just started, there is a fair chance that the bond will start to drop and take gold down with it before gold has a chance to change direction.

The commitment of gold futures traders took a quantum leap during the week ending last Tuesday; commercial traders backed up the truck and dumped their load, while the large speculators scooped it all up.  We now have two VERY crowded rooms.  The fact that gold continued to drop in price on Wednesday and Thursday, implies that the increase in the commitments is even greater than the reported numbers.

Considering the fact that the FED is likely to raise rates at least once in the next six months, chances are that the Dollar will continue to strengthen, causing panic among the speculators in the long room.  We think that in the near term, the fundamentals will keep the commercials comfortably in the short room.

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Quelle: Nicholas Gomez