Thursday's intraday reversal was odd… But rarely something to fear… Commodities take center stage in Trade Cycles… Jobs report delivers some "good bad news"… Jonathan Rose hedges the mini-bloodbath for as much as 500% gains… Earnings must deliver all good news this season…
By Michael Salvatore, Editor, TradeSmith Daily
Stock market investors were happily plodding along in their station wagons on Thursday.
Sun shining… birds singing… All seemed well. The Nasdaq was up 1% on the day and hanging out there with seemingly little reason to do anything different.
It was, as a former colleague once called, it "a gap and hold" day. Almost delightfully boring.
Then, all of a sudden, a black cat darted out in front of the road. Investors slammed the brakes… and chipped a tooth on the steering wheel. The Nasdaq then closed down 1.5%.
Where'd that cat come from?
Ask and ye shall receive answers running the gamut from escalating wartime tensions and outperformance in defense stocks, to Federal Reserve member comments about rate cuts and inflation.
But looking for clues in the headlines isn't half as interesting to me as finding clues in the data.
Bespoke Investment Group published a study Friday morning showing that an intraday move from 1% up to 1% down in the Nasdaq 100 has only happened 57 times in the last 20 years. Of those, only a handful happened outside of bear markets.
Source: Bespoke Investment Group
Are we in a new bear market now? Well, no. We'd need to see a lot more blood before we can call that.
Could we be soon? Maybe… but I don't think it's likely.
❖ It helps to think of all the things that DIDN'T happen while stocks sold off on Thursday.
Let us count the signs of a nothingburger…
The dollar barely moved, ending the day just 0.12% higher. In a true risk-off environment, you see bigger moves than that.
Bonds, similarly, were stagnant. Bond yields dropped slightly after comments from Minneapolis Fed president Neel Kashkari about the Federal Reserve not needing to make any rate cuts this year, but they're right back to where they started the week.
And gold also didn't budge. It's been trending higher, but there was no evidence of a flight-to-safety trade there, either.
Maybe a few weeks from now we'll be wiping egg off our face, but it appears like this was a garden-variety correction that briefly felt like something more. We stopped just short hitting of the cat, and we can continue on our merry way.
❖ That doesn't mean this is the same bull market we saw in 2023…
As we've been observing in these pages, the rally is broadening beyond the Magnificent 7 stocks and into sectors that most investors hardly ever think of.
Take, for example, commodities. Gold and silver have ripped over the past week, with gold rallying about 3% and silver up almost 8%.
Oil, too, is up over 6%. But Trade Cycles editor William McCanless has his sights set on another fuel commodity: natural gas. So much so, he's calling it one of those "slapped in the face" trades we mentioned recently.
Here's William writing to his Trade Cycles readers on Wednesday…
Commodities are very, very cyclical. So, although you have to take a lot into account when using seasonality with equities, often with commodities you can just count on the seasonality itself as the main point of analysis.
And rarely do I see a current year's price matching up so nicely with the historical average.
Take a look at the United States Natural Gas Fund (UNG) in our TradeSmith Seasonality tool below. The blue line is the current year, and the green line is the 15-year average — look how beautifully they match up. Almost as if they're 1-to-1:
And looking at our Trade Cycles algorithm as well, you can see that UNG is in a Valley, poised to move up into the next Peak, which is from March 10 to June 14 — right in our seasonal window for this trade.
Seasonality is a huge part of the analysis at play in Trade Cycles, but there's far more that goes into a "slap you in the face" trade setup.
William thinks this is what we're looking at in natural gas.
If you want to follow along, you can check out the United States Natural Gas Fund LP (UNG), which William recommended his subscribers buy to take advantage.
He also recommended a short-term trade set to deliver multiples on the gains of UNG over the next several months — but that we'll save for his paid-up subscribers.
Interested in trading the short term through the lens of data and historical evidence? Trade Cycles is where you want to be. Go here for more info on that.
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❖ Zooming back out, the jobs numbers came in for the U.S. and Canada on Friday…
Here's Bloomberg with the important numbers:
U.S. payrolls rose in March by the most in nearly a year and the unemployment rate dropped, pointing to a strong labor market that's powering the economy.
Nonfarm payrolls advanced 303,000 last month following a combined 22,000 upward revision to job gains in the prior two months, a Bureau of Labor Statistics report showed Friday. The rise exceeded all expectations in a Bloomberg survey of economists.
The unemployment rate fell to 3.8%, with more people joining the workforce and able to find a job.
The U.S. continues to stand out as a resilient economy on the world's stage, especially as one of our close neighbors, Canada, struggles with job gains.
Canada lost 2,200 jobs in March, against expectations of growth of 25,000 new jobs. The unemployment rate rose to 6.1%, the highest rate since 2017 if you set aside the anomaly of the COVID pandemic.
Jobs are one of the most important economic health indicators. Economies don't tend to expand without people working, and they don't tend to contract when more and more are employed.
And since the U.S. economy is yet again showing no signs of contraction, traders yet again trimmed their expectations for rate cuts in 2024. As we covered recently, the market is now more hawkish than the Federal Reserve — expecting less than 75 basis points in cuts this year.
The odds of a June rate cut are now just over 50%, down from 59% a week ago. And the probability of rates holding at the June FOMC meeting are now at nearly 46%, up from 34% just a day ago.
As has been the story for much of the past year — good for the economy, and bad for any investors and small-cap-company CEOs starved for lower borrowing rates.
But there's an even stranger situation.
Major, neighboring economies are struggling while the U.S. trudges onward. Where many central banks would before follow the U.S. Federal Reserve's interest rate policy, they're now breaking from it and cutting rates ahead of it.
This anomaly is worth monitoring. Right now, the success enjoyed in the U.S. isn't spilling out to the rest of the world in quite the same way. If and when cracks start to appear, the reaction in the stock market could be swift.
One final note on the jobs report worth mentioning…
On Thursday, ahead of the intraday selloff and before the jobs report, Masters in Trading founder Jonathan Rose offered up a trade to serve as "portfolio insurance" should things go pear-shaped ahead of the report.
As we now know, they temporarily did… and the trades Jonathan suggested were at one point up as much as 500%.
That's the kind of guidance Jonathan's viewers are getting, every single day at 11 a.m. Eastern, in 15 minutes or less.
If you're the kind of investor who wants to learn how to hedge against volatility and make some big gains while you're at it, joining Jonathan is a must. Learn more about that here.
❖ Here's a potential catalyst: earnings season…
Mike Burnick highlighted earnings season in his recent Mike's Money Line — a regular look at the markets as part of the Constant Cash Flow advisory.
Mike says that since interest-rate cuts likely aren't coming anytime soon, earnings really need to come through in the weeks ahead to justify the expensive valuations we see in stocks today. Here's Mike with more:
Wall Street sees first-quarter 2024 profits for the S&P 500 growing 5% year-over-year. And the good news is companies have easily surprised on the upside in recent quarters. And so it's possible we'll see double-digit profit growth again, just like we did last quarter.
And speaking of a strong economy, the Citigroup Global Economic Surprise Index shows we're getting more positive surprises over time.
Notice the S&P 500 has moved in lockstep with this index over the past year.
This tells me that as long as earnings and economic data keep beating expectations, the stock market's rally has room to run.
Keep in mind, we have started to see a handful of companies begin to issue poor forward guidance. Notably in consumer discretionary brands like PVH, Nike, and Ulta Beauty, CEOs on the whole think consumers are set to spend less — which will hurt company earnings.
Only time will tell how this plays out… but you don't have to sit idly by, either.
❖ Andy and Landon Swan are gearing up to publish their first Earnings Season Pass report for Q2…
Using this dataset scored their readers a 96% win on E.L.F. Beauty (ELF) in three days last earnings season. And late last year, they successfully called a surge in Dick's Sporting Goods (DKS), resulting in an 80% win in just one day.
For active traders who want the opportunity to profit on earnings season — both to the upside and downside — the Earnings Season Pass is worth a serious look. Go right here to learn more.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
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