Hey There Income Hunter,
Friday’s non-farm payroll report has thrown a wrench into the Fed’s plans.
And just when oil price drop was giving the Fed a critical piece of the puzzle for it to pull back the reins on tightening.
Oil dipped below pre-Russian invasion price thanks to Biden’s opening up of the strategic reserves to add 1 million barrels a day. It may not have been a good long-term move, but what politician looks beyond the next election?
All the Fed needed on Friday was a weakening in the employment picture. Had that occurred, I believe Jerome Powell would have been in position to introduce a pause heading into the Jackson Hole Economic Policy Symposium later this month.
Instead, the Biden administration will tout that the US is not in recession, despite two negative GDP prints in a row. Plus, the Fed will continue to have a green light to keep tightening.
Today, I’ll give you the facts on what the internals say about Friday’s number and what we can expect this week …
The Truth on Jobs
About 3-months ago, something snapped between the establishment and household jobs survey. The household survey slipped lower while the establishment survey kept rising.
Seriously, look at the graph below. How can the establishment survey continue following a trend on a linear path when the economy is in a technical recession?
Meanwhile, layoffs have soared since May.
Notice the August data, which is just one week’s worth, continues to rise.
So, what is going on? … It’s all about the increase in multiple job holders, a number which has been trending higher, hitting a new post-covid high in June of 7,541 million, an increase of 263,000..
Even more shocking is that the category of multiple job holders whose primary and secondary jobs are both full-time hit a new record.
The establishment survey is far slower to pick up on real-time changes in employment. The engineers of the survey, the Bureau of Labor Statistics, can be persuaded by the White House’s bias that the economy is not in recession.
Based on forward-looking objective data, the labor market is already cracking … It will take the BLS a few months of looking the other way before the government accepts and admits what is truly taking place.
This Week’s Trading
Friday’s trading rallied on the strong headline employment number, then tested close to the 4100 strong support and closed close to unchanged on the day.
The trend of positive gamma – meaning a higher open interest in calls above the market than puts below – is the driving force that pressures implied vol lower. This could remain into the August option expiration (OPEX).
It would take a break below SPX 4000 to turn gamma negative … Until then support and resistance levels are:
Support: 4150 and then 4100
Resistance: Strong at 4200
The chart below shows the absolute gamma positions for calls and puts at each strike. Notice how large the gamma position is at the 4000 strike and the large positive gamma position at the 4200 strike.
I am looking for an opportunity to put on bearish strategies against the 4200 level or purchase bullish strategies on the VIX as we head into September.
Until then, positive gamma positioning supports a buy-dips-and-sell-rips environment.
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Watch the 100-Day Moving Average
Since the equity market has trended lower, notice in the chart below how each relief rally flirted with the 100 day moving average (DMA) but ultimately failed.
I envision a similar scenario in the weeks ahead as well …
As I mentioned earlier, I do not see Friday’s numbers changing the US economic environment …
Plus, September will mark a doubling of the Fed quantitative tightening cycle, which will have an even more negative impact on the markets than the rate hikes.
Bring It Home
My highest conviction play continues to be looking for dips in gold, silver and mining stocks.
The drop in tax receipts we are likely to see in the weeks will make it obvious the economy is in recession and this will force the Fed to back off from tightening.
The Fed pivot will be bullish for precious metals.
I also think the geopolitical risks, plus the ongoing gold purchases by the BRICS nations (Brazil, Russia, India, China and South Africa) to diversify away from dollars will support precious metals as well.
Stay tuned for more on these evolving macro forces and as always …
Live and Trade With Passion My Friend,
Griff