Investors Sell a Bad Technical Setup After Surprising Jobs Report
Stocks sold off on fears that interest rate cuts are now less likely.
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Market participants were pleasantly surprised on Wednesday morning when the January employment data showed the creation of 130,000 jobs and a decline in the unemployment rate to 4.3%. This was much stronger than anticipated and produced a very sharp rally when the news first hit.
After some reflection, the news didn’t seem quite as positive because it cut the likelihood that the Federal Reserve would rush to cut interest rates to prop up the economy. The odds of a rate cut at the June meeting fell from likely to under 50%.
Technical Vulnerability
This sort of "sell the news" reaction isn’t uncommon, but what was different this time was that expectations were very low. Many investors were expecting a poor report, but after the recent volatility, the market was vulnerable to investors who were looking to escape the choppy market by selling into strength.
This action wasn’t "sell the good news," it was "sell the bad technical setup." The biggest problem was in the AI sector again, with software stocks rolling over after a decent bounce and the Magnificent Seven struggling as well.
Market Internals and Outlook
Small caps and speculative stocks acted poorly as aggressive traders moved to the sidelines again. There was some rotation into defensive stocks, and breadth wasn’t terrible, with about 39% of stocks in positive territory. The S&P 500 and DJIA were both close to flat and did a fine job of covering up much ugliness under the surface.
Unfortunately, this is messy and chaotic action and is not supportive of a positive trend. In addition, investors will have to wrestle with the CPI report which will hit on Friday. There are signs that inflation is cooling, but if that number surprises to the upside, there will be even more concerns about Fed rate cuts.
Closing Game Plan
I’d like to be more upbeat, but technical conditions are poor and there aren’t many positive catalysts on the horizon. We will just have to be patient and wait for things to improve.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
