Sentiment is in the Drivers Seat for Market Direction

The jobs report showed 175,000 jobs and an increase in the unemployment rate to 7.6% and the market rallies. The data was in line with expectation, but it wasn’t exactly a trend changing event, at least from my view. From the markets (investors collectively) view the reversal on Thursday in addition to the positive jobs report was a trend changing event. As I have learned over the years I am allowed to believe whatever I want… but the reality is what the market does. For now the buyers have once again stepped in to buy on the dip.

Sentiment is where I see the challenge short term. Investors are playing stocks like chameleons. The worries over the Fed ‘stemming’ the current easing efforts, QE infinity coming to an end. This is the new phrase the media has adopted for the Federal Reserve cutting the current bond purchases of $85 billion per month. If they call it what it is, it would probably cause more problems for the financial markets. That aside, without some clarity on how the Fed will act, and what the potential ramifications of the actions will be, expect more ups and down as investors grapple with how to invest their money both short term and long term.

Sentiment is also starting to deal with the ‘tappering’ comments, however there is still some anxiety over what is happening with interest rates. The continued climb has put excessive pressure on Fixed Income and dividend type assets. If this volatility continues to rise as a result of interest rates rising too far, stocks will likely disassociate with the correlation that exists between bonds and stocks currently, moving in opposite directions. This is a genuine concern as yields move higher.

Should we just watch the ten-year bond and quit worrying about the ‘tappering’? That was an analyst comment made about the current worries in the market relative to the Fed. It is true that the ten year bond will give you insight into what is happening and the impact to equities short term. Example, the current yield is 2.16% on Friday. The rise from 2.01% on Thursday’s lows equated to a rally in stocks. Thus, if yields are climbing you would look for equities to climb with them. If they are falling, you would look for equities to fall with them. Of course they will not do this in perfect harmony, but they will correlate effectively. The challenge to that strategy will come if what we discussed above transpires, interest rates moving too high and disrupt the comfort level of investors relative to bond yields and fear pushes stock prices lower.

The bottom line as we start a new week of trading is patience. The yo-yo effect of trading in this current environment will wear you out mentally and cause you to make bad decisions. Let the speculation and emotions play out and then take advantage of what is working. Sometimes doing nothing is the right thing.