Job Market Continues to Stabilize

Though this morning’s jobless claims data from the Labor Department showed a slight increase in the number of people filing for initial and ongoing unemployment benefits, the larger message, as has been the case for several weeks now, is that companies have largely stopped shedding positions.  While this lack of firing does not necessarily translate to the creation of new positions, it is further evidence that the U.S. economy is continuing to heal itself (with a fair bit of help from the Federal Reserve) and provide companies with sufficient optimism to stem the cost cutting tide that was the hallmark of 2008 and 2009.  As might be expected, the equity markets are largely looking past these numbers and are focusing the majority of their attention on Friday’s all-important Non-Farm Payrolls report from the Bureau of Labor Statistics (BLS).  As I alluded to last night, expectations for Friday’s number have been ratcheted up sharply in light of Wednesday’s blowout private sector employment report from ADP.  Though there is still a fair amount of estimate revision going on among market economists, it appears that expectations have moved from a net gain of 150,000 jobs in December to nearly 200,000 (some estimates are as high 400,000+).  To me, this increase in expectations, especially in such short order and fully contingent upon the ADP data, sets the equity markets up for disappointment at the end of the week.  Historically speaking, the correlation between ADP’s estimates and those of the BLS have been fairly week, so I think it’s a bit presumptuous to extrapolate huge gains on Friday from Wednesday’s estimate.

Outside of the equity markets, it seems like debt, commodity, and currency markets are suggesting that a pause in this three month rally among nearly all markets is coming.  Treasuries, after taking a beating during the latter part of 2010, have stabilized and seen their yields stabilize just below their recent highs.  With so much talk about imminent inflation driving the recent spike in yields, the fact that prices for commodities like crude oil, natural gas, and gold have stalled at nearly the same point in time during which Treasury yields reached their highs suggests that there is a growing concern over global demand in the near term and, by extension, a pullback in inflation expectations.  With emerging market economies like India and China driving much of the expanding demand for commodities, their recent policy moves to contract economic growth (to head off inflation) may finally be putting a dent in their voracious appetite.  And, more importantly, it seems investors are coming to this realization as well.  Couple this with the recent strength of the U.S. Dollar (as judged by the Dollar Index) and the picture for commodities, as a whole, is becoming more clouded by obstacles to further near-term price appreciation.  That’s not to say that the long term bullish trend is reversing.  In my view, the upward trend in energy commodity prices appears as strong as ever.  But as with any long-term trend, there will be periods of pullback as investors take profits and reevaluate the economic landscape.  And this is exactly what’s happening right now in my opinion.

As is so often the case, talk of commodities must include a few words on gold.  Ironically, though, gold has been among the least commodity-like assets out there over the past few years as much of its demand has been driven by currency devaluation fears and price momentum.  But that aside, the gold market is in an interesting place here.  As most of you are well aware, I advocated strongly for shorting gold around the $1,360/troy oz. level a few months back.  While I did get the timing of the stall in gold’s march higher correct, the yellow metal has simply refused to breakout on the upside or the down.  Have a look at the daily chart below.

As you can see, gold has really struggled to get through the $1,425 level and actually put in a triple top earlier this week.  While this is certainly a bearish development, another interesting technical development has been gold’s unwillingness to break below its 50-day moving average (it’s bounced from this level 4 times since August 2010) and its series of higher lows since November.  This has formed a bullish ascending triangle on gold’s daily chart, which, if confirmed, suggests that gold is ripe to move up to the $1,525 level.

However, have a look at the weekly chart of gold. 

Momentum indicators like the RSI and MACD suggest that the intermediate trend in gold is primed for correction, but, compared with a month ago, these indications are not nearly as bearish as before.  Perhaps more importantly, though, it is clear from the weekly chart that the longer term trend is still intact as indicated by the blue trend line.  So, as is seemingly always the case, we’ve got a bit of a divergence in the technical indicators for gold.  My read is that gold has had sufficient time to put in the dip I expected and has failed to do so.  Technical indicators are generally improving for the yellow metal, though there is still some reason for caution.  However, given my negative outlook for most risk-on markets (equity, commodities, etc.) over the near term, I think we’re nearing a point in time where investors will once again seek out ‘safe haven’ asset classes when/if this correction occurs.  Put in terms of risk, I’m suggesting that risks have moved meaningfully from the downside and now lie mostly on the upside.  As such, I will be squaring my short position very soon and will likely add outright gold exposure.

For the rest of today’s session, I expect a fairly muted trade as the markets continue to wait for tomorrow’s jobs data.  Again, I’m fairly skeptical of the numbers meeting tomorrow’s raised expectations, so I wouldn’t be buying ahead of the report.  Aside from this, I’ll continue to be focused on gold’s trade today as well as the recent move up in the Dollar Index for additional signs of growing investor skepticism.

Until later…..