The December employment report showed growth in almost all sectors of employment.
Participation was positive:

  • employment/Population Ratio ages 25–54: Rose +0.1% from 79.0% to 79.1%.
  • The overall employment to population ratio for all ages 16 and up was unchanged at 60.1 m/m and is up + 0.3% YoY.
  • The labor force participation rate was unchanged m/m and is also unchanged YoY at 62.7%.

Aggregate payrolls and hours increased:

  • +143,000 jobs were added (short of the 185k expected).
  • U3 unemployment rate was unchanged at 4.1%.
  • Aggregate hours worked in the economy rose by 0.1% from 115.9 to 116.0.
  • The index of aggregate payrolls rose by 0.7% from 172.2 to 172.9.

However, the report was rendered mediocre by signs of late cycle deceleration:

  • ‘Not in labor force but want a Job now’, rose +43,000 from 5.265 million to 5.308 million.
  • The average manufacturing workweek fell -0.1 hour from 40.9 hours to 40.8 hours.
  • Involuntary part-time employment has increased (+7000).
  • Wage growth rate is declining.

Overall, the report is not bad, especially when you take the hurricanes in Q3, and the Christmas holidays into account. The report was what you would expect from a late-cycle bull market.


The AAII investor sentiment survey is now getting really interesting; the bull sentiment jumped +7.1% to 59.8%, and the bear sentiment fell -5.1% to a very low 15.6%.

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The NAAIM index 50 MA continues to roll-over while the SPX charges higher. This negative correlation is similar to what preceded the 2015 double-dip correction. The fact that the market has refused to correct a healthy 3–5%, could mean that in the near future the correlation will revert to the mean with a more substantial 10–15% correction in the S&P 500, like it did in 2015 (chart below).

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The long-term technical averages continue to demonstrate a late-stage bull market and no warning signs are evident. The 8-month moving average falling below the 12-month moving average would be a long-term bear signal. The ADX trend (black line) still has room to move up before it bumps up against the down-sloping major trend (blue dashed line on chart below), but the bullish and bearish momentum (green and red lines, respectively) are both at extreme levels which could facilitate a correction (chart below).

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The 10-y minus 2-y differential was unchanged at 0.51. If it maintains this slope, the curve will invert in the second half of 2018 and imply a recession to start in 2019. No flags at this time scale.

Fundamentally, we continue in a secular bull market where interest rates, GAAP earnings (a new high) and industrial production are rising, while the unemployment rate is falling. It is notable that the Fed funds rate has displayed a declining topping pattern over the last 35-years (pink trend line on chart below). Accordingly, it looks like this hiking cycle could max-out around the 2.0% level for the Fed funds rate late in 2018, which would align with the timing of the next recession derived from the 10-y minus 2-y chart. (chart below).

This week, we opened a position in Phivida (VIDA on the Canadian exchange) which we think has huge potential as pot prohibition is removed around the world.

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Gold correlates to the four really big markets: the dollar, Treasury rates, USD/JPY ratio, and inflation expectations (TIPS). During the last couple of weeks, gold has displayed some anomalous behavior; trading with a positive correlation to all three rate curves; rising while the USD/JPY ratio stagnates, and trading with a negative correlation to TIP.

The chart below shows that correlations of gold to the 2-year, 10-year, and 30-year treasury rates have all spiked up into the positive. Historically, these spikes have reverted to the mean rather quickly, which means either rates drop as gold continues to rise, or gold turns back down while rates continue to rise.

In the meantime, the dollar seems to have arrested its drop and is now testing the recent lows (chart above).

Gold has rallied while the USD/JPY ratio has not. This discordant behavior is unlikely to continue; either the USD/JPY ratio drops as gold continues its rally, or gold ends its rally and the ratio continues to strengthen (chart below).

Finally, during the first two weeks of December, gold and inflation expectations traded divergently (negative correlation) as gold dropped while TIP rallied. This is the same thing that happened in mid-2016 just before rates went up (and TIP dropped) and the gold price collapsed during the second half of the year. Since rates have an upward bias, and a low dollar gives the Fed room to raise rates which dampen inflation and strengthen the dollar, it is probable that gold will weaken like it did during the second half of 2016 (chart below).

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The commitments of futures traders continued to move in the bear direction; the producers increased their net short position by 18k contracts, the swap dealers more than doubled their net shorts to 19k contracts, and the speculators increased their net long position by 41k to 148k. These are not extreme bearish levels, but they are increasing and are historically elevated (chart below).

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