Wall Street traders await the first Friday of every month with bated breath.
Why? Because it's Nonfarm Payrolls Day!
When the news is posted at 8:30 a.m. ET, the market often gyrates wildly in response. And last Friday was no exception!
So let's walk through exactly what happened in the markets the morning of Sept. 7, and look at what impact we can expect this to have moving forward.
A Whopping Nonfarm Payrolls Report Catalyzed a Hectic Day of Trading
The Bureau of Labor Statistics (BLS) reported that payrolls grew by 201,000 in August.
But the futures immediately sold off. That was the first knee-jerk reaction as professional traders decided that good news was bad news, which is kind of the way we look at it. We know that strong economic data will encourage the Fed to continue draining money from the banking system, and that ultimately, this is bearish.
But the next wave came within moments as day trader shorts who were betting on a sell-off rushed to cover and take profits.
Then came the regular market open in New York at 9:30 a.m. Big investors who waited until regular trading hours were in a sour mood, and they sold the news, driving the S&P down to 2,864, which was back below the January high of 2,873.
That would be significant if the market stays below that level, and particularly if it drops below 2,860. That would break the uptrend that dates all the way back to the June low. And that would signal that we bears are finally about to be vindicated in our view that the Fed's withdrawal of base liquidity from the markets really does matter.
The Treasury market certainly noticed. The 10-year yield gapped up to 2.95%, the highest level since Aug. 9. This appears to complete a month-long reversal pattern from the pullback in yields in early August. Higher yields matter because they show that money really is tightening. And they also help bonds to compete with stocks for the dwindling available cash.
So none of this looks bullish.
The funny thing was that by mid-morning, bullish traders again rushed in to drive the S&P 500 back to 2,884. But by 12:30 p.m., the second thoughts had again crept in and the S&P was back near the morning lows.
It's enough to make your head spin!
But do we care? Not really.
Bulls Shouldn't Get Too Excited About the Report – and Bears, Rest Assured!
As I have reported to you in my tracking of the federal withholding tax data, the BLS has been overstating the job gains through the "miracle" of statistical manipulation, the most glaring of which is seasonal adjustment.
I had warned you that the tax data from June and July was weak, and that the job gains that the BLS was reporting appeared to be bogus. Lo and behold comes Sept. 7's release, and the BLS shaved 90,000 jobs off the June and July original releases. That's about a quarter of the originally reported gains!
Then once a year in February, the BLS benchmarks the jobs data to reflect reality, adjusting the numbers based on studies of tax data. Given what the real-time withholding tax data has been telling us is reality, you can bet that there will be another big downward revision in February.
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So please don't pay too much attention to this monthly circus. The result of it is what the elephants leave behind after they have paraded by.
The only thing that matters to us is that the Fed pays attention to the parade, and not what's left behind. So as long as the headlines are bullish on the economy, the Fed will continue tightening. And that, my friends, is the only thing that matters in my view.
Tax Data Reveals This Could Be the Final Blowoff in History's Greatest Stock Market Bubble
Traders may have used margin borrowing up the wazoo to buy stocks and stock index futures over the past couple of months. U.S. corporations may have repatriated countless billions in cash, and used that cash for these phony baloney stock buyback scams that line their executives' pockets. Corporate pension funds may have spent more billions buying stocks to get in under the Sept. 15 deadline for a big tax break.
All of that certainly happened. And all of that certainly helped to drive what I think is the final blowoff in the greatest stock market bubble in history. They did so under the pretext of a "goldilocks" economy that will go on indefinitely.
There's just a little problem with that view.
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It doesn't square with the evidence that the massive tax cut is not stimulating growth.
The Fed is watching the headline economic data and it is determined to continue tightening as long as that data remains strong. But while it looks strong on the surface, the tax data, which isn't manipulated, has been telling us that it's weaker than the headline numbers suggest. It's an accident waiting to happen. And it will surprise investors when the headline economic data begins to catch up, as it ultimately must. They cannot fudge the numbers forever.
The Treasury publishes the data on tax collections every day with just a one-day lag. The data is very noisy, so I smooth it using a couple of short-term moving averages to reflect monthly data based on typical pay periods. Then I derive an annual rate of change. You can see that the new tax law resulted in a drop in collections in February and March. But since then, if the tax cut were really stimulating the economy, this year-to-year rate of change should have begun to strengthen after the February-March drop.
But as you can see, it hasn't.
The blue line, representing the annual growth rate, is still wallowing below the level reached right after the tax cut took effect. There's no evidence of growth. And this data is nominal.
Wages are growing at 3% annually. That means that 3% inflation is included in the withholding tax collections. In real terms, after inflation, the growth rate was -4% in March, which is the effect of the tax cut. But today that has dropped to -5%. That's a decline of one percentage point in the growth rate since March. That's a period in which the BLS is telling us that the economy added around a million jobs. It's a period in which the tax cut should have been stimulating growth.
Something doesn't add up here. The tax data suggests that jobs growth, at the very least, has slowed since March. Meanwhile, the headlines suggest that all is hunky dory on the jobs front. All the while, the Fed keeps tightening the screws.
With Fresh Jobs Data at Hand, It's Time to Buy Puts
I think that reality will soon rear its ugly head. Traders and investors will have a nasty surprise, and the market will have an accident. The change in sentiment will be swift and violent, and so will the market reaction.
I will watch the technical indicators for you, for signs that that change is under way. This week's tape action certainly suggest that doubts are creeping in.
Back on Aug. 20 I had suggested buying a few SPY calls to take advantage of any upside, while we sit mostly in cash.
I think the time has come to remove those hedges.
The time to buy puts may be at hand.
I'll keep you posted.
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The post Here's What We Can Expect from a "Head Spinning" Nonfarm Payrolls Day appeared first on Lee Adler's Sure Money.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.