Weekend Strategy Review June 4, 2016

Posted by OMS  at June 4th, 2016

Two days after President Obama was telling American’s how great the economy was doing under his administration, we got the truth.  Friday’s Jobs Report was a disaster.

The BLS said that only 38,000 jobs were created in May.  It was the worst Jobs report I can remember.  The estimate was for 164,000.  How can they miss by so much?  I can easily understand a miss by 10,000 or even 20,000 jobs, but what good are estimates if they’re going to miss by over 100,000 jobs?  BTW, the previous two reports were also revised downward.  Imagine what would happen to you if you missed your estimates by this amount.  You’d probably be fired!

The BLS also said a record 94,708,000 Americans were not in the labor force in May — 664,000 more than in April — and the labor force participation rate dropped two-tenths of a point to 62.6 percent, near its 38-year low.  Stop and think about this for a minute.  It means that about one in every three Americans are NOT working!  How can you have a vibrant economy when so many people are out of work?  You can’t!

When President Obama took office in January 2009, 80,529,000 Americans were not participating in the labor force.  Since then, 14,179,000 people have left the workforce. A lot of them because they were laid off or can’t find work.  That’s why the unemployment rate is only 4.7 percent.  If you don’t look for work, the government doesn’t count you as unemployed, so the number goes down.  It’s crazy!

Besides, we know that the government uses a huge ‘fudge factor’ to estimate the number of new jobs created, so the 38,000 is really only an estimate.  In other words, based on the downward revisions that took place in March and April, the 38,000 will likely be reduced when the new numbers are released in July.  The revised number could be zero!

The Dow fell over 100 points on the news, but recovered all but 32 of those points by the close.  On the surface, it looked like little damage had been done to the markets.  But as we know, looking at the surface tends to hide what’s really going on below.

On the surface, bank stocks took a hit and gold rallied big time, up over 33 points to 1244.  Wall Street figured that Ms. Yellen wasn’t going to be raising interest rates anytime soon in view of the horrible jobs numbers.  And without rising interest rates, banks will have a hard time making money.  The value of their loans just went down, because they will likely be repaid in cheaper dollars. 

A cheap dollar made gold look attractive.  So now we need to look at the possibility that wave 2 down in gold completed on Friday and that wave 3 up is underway.  I don’t want to make that call yet, because I need more time to look at the charts.

But the fact that UUP, the ETF for the Dollar, dropped off the Dean’s List and was replaced by UDN, the inverse ETF for the Dollar, makes a declining Dollar a real possibility.  In my Comments on Friday, I mentioned that I would not be buying gold until I saw UND back on the Dean’s List.  Now this has happened.

The fact that UDN has re-appeared on the DL also means that we now need to give more weight to any negative chart patterns for the Dollar.  And right now, the best case negative chart pattern I have for the Dollar calls for a steady decline to the 70 level, with a target of slightly below 50.  In other words, the Dollar, which is currently trading near 94 after Friday’s hit, could get cut in half! 

Again, I want you to think about what this means.

Normally, a weak Dollar is good for the equity markets.  When the Dollar weakens, money tends to flow from Bonds, which are paying low interest, into equities.  Especially those equities that pay good dividends, like the utilities.  This is what normally happens.  

But in an economy that is not growing, and could be on the verge of falling into recession, you can throw away what’s ‘normal’.  If the economy goes into recession, …remember the current GDP growth rate has been falling for the past few months and is now hovering near zero.  If the Job Market continues to worsen, and I don’t see how it can improve with all the new regulations coming out of Washington that continue to stifle business, we’re likely going to see negative GDP growth numbers the next time they are released.  And trust me on this…IF the country goes into recession, the current P/E ratio for the S&P 500 which is 24.26, will get cut significantly.  Right now, with a P/E of 24.26, stocks are EXPENSIVE!!!  In a recession, P/E’s below 15 are more normal.  In a depression, P/Es below 10 or 11 are common.

So think about what this could mean to the price of the S&P500.  If the economy enters recession and company earnings decline to cause a P/E of 18, it would mean the S&P could fall from 2099 to 1557.  If the P/E dropped to 15, a much more ‘normal’ P/E during recession, the S&P could fall to 1297!

Like I said, be careful of what you see on the surface.  It’s what’s underneath the surface that counts.  And right now, that’s starting to look pretty ugly.

Folks, don’t be fooled when some political hack tells you things are OK.  They will say anything to get your vote.  Look at what’s really going on.

Yesterday Walmart announced that they will be replacing workers with robots to check inventory.  They realize that they can’t stay in business if they have to pay someone $15 an hour to check you out or to check inventory.  That’s why they are replacing people with machines at the cash register.  So when you use the self-check out register, you get to replace a minimum wage earner every time you shop.  And Walmart doesn’t have to pay you!

BTW, the government estimates that raising the minimum wage to $9 /hour eliminates 100,000 jobs.  Raising it to $10 eliminates half a million jobs.  Wow!  Makes you wonder how any politician in their right mind can advocate a minimum wage of $15 with almost 95 million Americans out of work? 

Anyhow, because UDN has replaced UUP on the Dean’s List, it changes things. This is all I want to tell you this weekend.  Things have changed.  The pattern and indicators still suggest that a move toward 18,168 on the Dow is possible. But once traders come back on Monday and realize what Friday’s miserable Jobs Report actually means, the pattern and indicators could change quickly. 

Right now the surface still looks calm.  But it’s what lies underneath that troubles me.

Get a copy of the Update webinar I did last week.  I’m making it available for a small fee just to cover the cost of the software I had to buy to provide this timely information to you.  Learn about the importance of the Dollar and how it impacts everything that can be traded.  Everything!  If you don’t thoroughly understand the relationship between the Dollar and the Dean’s List, you are NOT getting the full benefit of the List.  The information in the webinar will give you a totally new way of looking at the Dean’s List.  So please, get a copy.  Remember, I didn’t do this webinar for me.  I did it for you.

Have a great weekend,

That’s what I’m doing,

h

Market Signals for

06-06-2016

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