Commenting on today’s trading with a focus on the crucial Government jobs report tomorrow, Gorilla Trades strategist Ken Berman said:
The fact that the major indices hit new five-week highs in a concerted fashion confirms the end of the August pullback, and barring another twist in the trade war, a larger scale rally is likely underway in the stock market. Today’s very strong services PMI means that a full-blown recession could still be avoided despite the weakness in manufacturing, and as we so today, the battered China-related stocks could be ready for an old-fashioned short squeeze.
Carlson Capital's Double Black Diamond Fund returned 85 basis points net in August, bringing its year-to-date net return to 4.51%. According to a copy of the fund's September update, which ValueWalk has been able to review, its equity relative value and event-driven strategies outperformed during the month, contributing 131 basis points to overall P&L. Double Read More
The major indices finished significantly higher for the second day in a row, as the positive trade developments and the reassuring economic numbers triggered a broad rally in stocks. The Dow was up 373 or 1.4%, to 26,728, the Nasdaq gained 140, or 1.8%, to 8,117, while the S&P 500 rose by 38, or 1.3%, to 2,976. Advancing issues outnumbered advancing issues by an almost 4-to-1 ratio on the NYSE, where volume was above average again.
The tech and services sectors spearheaded today’s advance, but even the notoriously weak small-caps performed above the market average. Financials and large-cap banks, in particular, shined as well, but consumer goods lagged the broader market, as investors took some chips off the table ahead of tomorrow’s government jobs report. Safe-haven assets finally took a hit, but Treasuries, gold, and the defensive utilities stocks are still very close to their recent highs. European and Asian equities also continued higher today, and this is the first time in months that a global risk-on rally is unfolding.
The Chinese have not just agreed to resume the trade negotiations with the U.S. in October, but according to widespread rumors, the Asian powerhouse wants to reach a breakthrough next month. Although the country’s apparent economic weakness might be the main reason behind the shift, risk assets could still enjoy tailwinds in the coming weeks following months of hectic trading.
Government jobs report preview
Investors are likely in for another tumultuous session tomorrow, since the government jobs report is coming out before the opening bell, and Fed Chair Jerome Powell is scheduled to give a speech in early afternoon. In recent months, the ADP payrolls number has been closely correlated with the official non-farm payrolls number (NFP), so in light of today’s positive surprise, we could be looking at another strong release. Analysts expect the NFP to come in at 160,000, while hourly earnings are forecast to increase by 0.3% for the second month in a row, and the unemployment rate is expected to be flat at 3.7%.
Just a few days ago, analysts were contemplating the possibility of a 0.5% rate cut by the Fed this month, but after today’s session, the odds of an aggressive easing step collapsed. The positive global political developments, the easing of the trade tensions, and the global improvements in the services sector caused a strong bounce in Treasury yields. German yields are also back above 0%, for the first time in five weeks, so Jerome Powell might downplay the risk of a global recession tomorrow. Analysts still expect a 0.25% cut, and should the Chairman give a hawkish speech, we might see another spike in volatility tomorrow afternoon.
Today’s rally was enough to change the direction of the short-term trend on Wall Street, and since the positive underlying trend was never in danger in August, stocks are now bullish in all-time frames. The major indices are all well above their 200-day moving averages of 7,616 for the Nasdaq, 2,809 for the S&P 500, and 25,640 for the Dow. The benchmarks are now back above their 50-day moving averages of 2,945 for the S&P 500, 8,048 for the Nasdaq, and 26,563 for the Dow as well, and suddenly, their all-time highs are within striking distance again.
The Volatility Index (VIX) collapsed by more than 20% utilities sector, in line with the healthy rally in stocks, and technicals tell us that the ‘fear gauge’ could fall much lower. The VIX dipped below its 50-day moving average for the first time since late-July, and it also fell below its 200-day moving average thanks to the sharp risk-on shift. Before the start of the correction the index was hovering around the 13 level, and should investor sentiment remain bullish, it could return to that range in a matter of days, which would represent another 20% from today’s closing level of 16. Stay tuned!