There is a lot going on to roil the markets, so today we’ll take a look at how jobs, oil and market volatility are playing a role in the current market environment.
A Solid Jobs Report, But You Can’t Please Everyone
Last week’s job number took many people by surprise, especially since it was so positive: 321,000 new jobs created based on the latest survey, causing previous reports to be revised upward.
Yet, all I heard yesterday were complaints: the jobs created were temporary, they are not high-paying career-type positions, this will turn tail in a couple of months. I disagree with all of this noise:
- First, any new job is great for the economy and especially for those who had been unemployed.
- Second, the skill level of the job doesn’t really matter. What matters is that companies are hiring, which means they are feeling bulish.
- Third, more jobs means more income, more spending, and a broader tax base.
This jobs report is indicative of an economy growing at a moderate pace, which can continue for the next three to five quarters (at least).
Oil is Gushing Out of Control
Many analysts were shocked that OPEC ministers decided not to cut production of crude. While the drop in price has been substantial over the past four months, the trend was pretty clear by looking at the chart. The bearish sentiment has also been seen in the increase of put options being bought in the futures market. OPEC controls supply, but it does not control demand, and therein lies the issue.
Demand for crude has not expanded to absorb the supply on the markets, hence prices fall. At some point the market will find a balance, but until then, we have to listen to speculation about companies’ health and spending in the years ahead. Of course, this is just guessing, so stay away from the noise and just pay attention to what the market is telling you.
No Fear According to the VIX
With the VIX indicator sitting just under 12%, it is understood that market players are showing complacency. That might be “normal” at a time when holiday cheer is being spread around, but extremes are something we need to guard against. Remember when the opposite played out in mid October? Fear was rising, and it hit a point of “I can’t take it anymore.” At the time, markets had corrected nearly 10% in a short month and volatility hit more than 30% but subsequently collapsed to where we are at today.
There are reasons for a rise in fear: An overbought market plus the recent Ebola crisis, which thankfully has dissipated but not before it scarred the airlines and travel business. Both sectors saw more than 30% declines in stock values. Then Ebola disappeared off the radar and lower oil prices hit (see above), and now these stocks are gaining some footing and approaching highs again.
Now would be a good time to lighten up on long portfolios, perhaps even buy some cheap protection via SPY, QQQ, or IWM puts. Why do we need protection? Every time we have seen volatility spike lower, we have gotten whacked. As Pete Najarian from Optionmonster said on CNBC’s Fast Money, “Expect to lose money on this” – “this” being a long portfolio.
