[Chart courtesy of MarketWatch.com]

1. Moving the markets

An early drop was followed by a mid-day pop, then momentum faded, and the Dow dove back into the red. The S&P 500 ended just about unchanged, but the Nasdaq ruled and closed in the green despite a total collapse in earnings.

It appears that early optimism about the step-by-step re-opening of the country was met by skepticism in that more hurdles than expected remain, while a V-shape type of recovery at this point remains a pipe dream.

As Bloomberg notes:

“With a majority of companies having now reported earnings in Europe and the U.S., the figures have been poorer than expected; and the second quarter will likely be even worse, given the lockdowns, and a recovery in the rest of the year isn’t obvious.”

Author Bruce Wilds added these succinct comments:

“It has become difficult to comprehend the size of the failure the political-financial complex has designed. This is partly because stocks have continued to soar with every announcement of rising unemployment and even as businesses continue to fail or file for bankruptcy. Bad news is not good news. The sick idea that poor spending habits are the answer to achieving a faster-growing economy is absurd and twisted. This is not new; politicians seem unable to grasp the fact economic growth does not necessarily bring about economic strength or long-term prosperity.“

With Saxo Bank summing it up like this:

“Investors continue to buy the reopening story, with markets remaining completely detached from fundamentals and the real economy.“

In other words, it’s no longer a secret that markets are out of sync with economic realty. However, should this relentless push higher continue, it’s certain that our Trend Tracking Indexes TTIs) will trigger a new “Buy” signal, which we will then use as a new entry point.

Right now, we are still watching the developments from the sidelines.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

An early 400-point gain in the Dow got cut in half, but at least all three major indexes managed a green close.

Jobless claims jumped by “only” 3.2 million in early May, which traders viewed as a slowing in job losses with some States now beginning to reopen their economies. The reality is that this still represents a 1576.9% surge in job cuts, according to Challenger, Gray and Christmas, with Bloomberg charting this fact here.  

Leave it up to ZeroHedge to sum up the debacle of the last few months like this:

COVID-America: 73,400 Dead; 33 Million Jobless; Stocks Soaring

The initial jobless claims chart shows an improvement, which makes you wonder if that indeed warrants the current stock markets levels. After all, in the past 7 weeks, job losses now total 33.48 million, which is over 12 times the prior worst five-week period in the last 50-plus years.

For sure, without the Fed throwing trillions of dollars of liquidity at the markets, we would be nowhere near current valuations.

Current market reaction assumes that the reopening of the country happens swiftly, effectively and with everyone returning to their previous jobs. I disagree, and so does Michael Every of Rabo Bank:

“For all of us, as we re-open May will show us just how many firms are going to fail in this new post-lockdown normal. US ADP jobs printing at minus 20 million yesterday and media reports that temporary job furloughs are becoming permanent ones says we should expect a deluge to follow.”

Even Minneapolis Fed mouthpiece Neel Kashkari came out opining on tomorrow’s jobs report:

“It will likely understated the real unemployment picture, as it will only reflect people who are actively looking for work, a nearly impossible task in a time of nationwide lockdowns, and that the country should steel itself for a long, gradual recovery.”

“Friday jobs report that covers April will likely show an unemployment rate of 16% or 17%, but that the real number is around 23% or 24%, adding that “it’s devastating.”

While these are only opinions, they are supported by the fact that some of the bond yields have hit record lows. We saw forecasts that negative rates are about to come true in a few months and are priced in for Q4 2020. The 2-year took out its previous record low today. All this was positive for gold, which rallied over 2%.

The decoupling from reality continues and, when looking at a global level, the picture looks just as bleak as domestically.

Right now, I am curious as to how much positive upward momentum the computer algos can squeeze out of tomorrow’s jobs report.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

It was a tug-of-war throughout the session, as an early rally died on the vine with two of the three major indexes diving into the red during the last 30 minutes. The exception was the Nasdaq, which managed to stay above the unchanged line but had to give up more than 50% of its early gains.

Amazingly, the markets were able to overcome ADP’s report of a loss of over 20 million private sector jobs in April, a number that is unprecedented. Bloomberg demonstrates in this sobering chart how this figure compares to history. It does not. This is mindboggling when considering that during the Great Financial Crises, some 10 years ago, the largest monthly job loss was “only” 834,700!

In the end, this reality check was too great to overcome causing the sell-off with nervousness spreading in anticipation of tomorrow’s weekly jobless claims data and Friday’s monthly nonfarm payrolls and unemployment report.

You have to laugh at the performance of the Nasdaq, which continues to rally in the face of collapsing earnings, thereby presenting a picture that is clearly distorted to say the least. This disconnect between markets and data is now the largest on record.

This abnormality is not exclusive to the Nasdaq, many major indexes are sporting the same kind of divergence, as Goldman Sachs points to in this chart.

According to Nomura’s McElligott the rally is now done, at least for the next few months, and as the Nomura strategist writes, “his sense is ‘lower’ for the next move across the Summer months, as I think the market’s current pragmatism towards the virus in conjunction with the “feel-good” of the rally leaving it exposed to the downside of a coming second-wave as cases, as restrictions ease and some States rush back to “normalcy”…yet with fewer Fed and fiscal bullets in the chamber next time around.”

While that is only one man’s opinion, I believe caution is still warranted until that moment in time when our Trend Tracking Indexes (TTIs) show enough upward momentum to generate a new “Buy” signal.