Vancouver Investment Advisor Ritch Wigham

Is this a U.S. Market Turning Point?

On Friday we had a release of employment numbers from the U.S.Commerce Department that the market had heavily anticipated for the previous couple of days. They turned out to be market positive and some very interesting reactions ensued.

I spoke (wrote) only last week of the desire of the government to use the U.S. dollar as a proxy for interest rates. Whether that was from direct manipulation or regular market forces is up to the reader. My belief is regular market forces in this circumstance. The Fed got exactly what it desired without ever once having to discuss the need for an interest rate adjustment. (higher rates).

Listed below I have attached links to 5 charts relevant to this article:

• September Euro
• Dollar index
• S&P
• 30 year T-Bond
• Copper

As you can see all these charts are 30 minute charts to highlight the action for the 6th and 7th of August. The 6th was as quiet a day in these commodities as we have had in quite some time and then “BWAM” (Emmeril has copyright on Bam) on the morning of the 7th immediately after the release of the numbers and lack of revision(to higher or more unemployed than had been reported earlier) all “HECK” breaks loose as the market tries to quickly adjust for what just happened. Remember that everyone was worried about these numbers signaling a longer and more protracted recession.

NOTE: There is a huge argument as just how important these numbers ultimately are, all I know is that they always, always, always have a market impact. Therefore we better try and understand what the reaction means, even if we could care less about the number itself. Remember everything big and small always has a market reaction and so consequently we must try and interpret its short term meaning in a broader longer term context.

So the longer time frame numbers were not revised upward and the short term numbers were more mild (newly unemployed) than expected. Result was a very bullish reaction.

As you can see the Dollar Index shot up, the Euro the same, the market the same(S&P) and the Bonds went into the crapper and copper shook off a stronger U.S. dollar.

Simple interpretation:

1. Everyone loves the dollar because the U.S. economy must be pulling out of the recession.
2. That is good for the stock market and the copper. OOPS did I say that
3. The bonds went down and increased their yield. OOPS that’s bad for the stock market and copper because it costs more to borrow and will slow down the recovery.
4. BUT THE MARKET WENT UP ANYWAY, even with a strong dollar and higher yields.

Conclusion:

The dollar acted as a proxy for the bond market as usually a strong dollar is bad for the market. Higher yields are bad for the market and metals and a stronger dollar makes it harder to sell your bonds ( read U.S. weekly bond auctions). For the first time in a very long time this didn’t result in a flight to “QUALITY” and a much weaker stock market.

Lets see what happens from here, but what this is really saying is get off the sidelines or you may be stuck there as your bonds loose value and the stock market goes higher!!!

Talk to you soon.

Ritch

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