This Has Never Happened Before

The JOLTS report for April (Job Openings and Labor Turnover Survey) showed something that has never happened since data collection started in the year 2000; there were 6,698,000 total job openings in April, which exceeded the number of unemployed civilians in both April (6,346,000) and May (6,065,000). There was lessthan one person (0.9 of a person) available to fill each job opening.

Why are there more job openings than unemployed workers? We see one likely possibility; the acceleration of the business cycle has led to an increase in end demand, which means employers require more employees and more technology to meet demand. The latter part is responsible for producing completely new job types that previously did not exist and which has led to a hi-tech skills mismatch.

If the job openings exceed the available supply, the first and most expedient remedy that comes to mind is an increase in compensation to attract workers and discourage losing existing employees. This, in fact, has been happening since mid-2016, but at a rate that is lower than during the previous expansion and lower than we would expect when unemployment is as low and labor demand as high as they are. This, along with the increasing Fed funds rate, is helping to keep inflation in check, but wages are destined to rise and produce higher inflation.

Wage Growth Year-Over-Year

The Fed is aware of this and has already announced that it might be willing to accept slightly higher inflation without accelerating the pace of rate increases. After all, the 2% inflation target is a rather arbitrary number, as was the 5% unemployment target that was part of the Fed’s dual mandate. The Fed has been raising rates while inflation remained below the 2% target, so now it will simply maintainthe pace of increases if inflation goes above 2%. The market is comfortable with the continuing rate hikes, having priced-in a 91% probability of a rate hike next week without interrupting its rally.

Rates will continue to rise, but so will the market…because sentiment says so.

The AAII independent investor sentiment bull-minus-bear differential remains solidly below the 15% level which demonstrates that participants are not overly confident. This continues to be bullish for the market (chart below).

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The two charts below, show the similarity of the trading patterns of 2000 and 2018 (pink highlight).

If we take a closer look at the highlighted patterns labeled C3 and R4, we see that they continue to match up. In the case of similar patterns, the shapes are similar, but not necessarily the time-frames; the more fractal-like the patterns are, the more different the time-frames tend to be. During the 1999–2000 tech-rally, it took 15-months to go from the double-bottom to the top of rally 3 (R3). In today’s market, it took 25-months to carve out the same pattern which means that rally 4 (R4) is likely to last much longer as well (perhaps 6-months) before making a top.

The next two charts show just how similar the C3 and R4 patterns from 2000 are to the patterns in today’s market.

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Market participants will eventually be unable to ignore the higher-highs and higher-lows, at which point, bull sentiment will rise above 50% and the bull-minus-bear differential will climb above 40%. Then and only then, will the conditions for a market-top be in place. While it is impossible to say exactlywhenit will occur, we are confident that it is not happening now.

The NAAIM index, although it has not turned up to follow the SPX higher, its decent is flattening and the correlation is increasingly positive (chart below).

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The 36-month MA of the Rydex bear-to-bull fund asset ratio continues its bullish decline. The nominal ratio spiked lower at January’s market high, but in 2000 it spiked lower twicebefore the S&P 500 topped-out six months later and the 36 MA of the ratio confirmed the top by moving higher. We need to see the 36 MA turn higher before a top is confirmed (chart below).

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The 10-year minus 2-year T-rate continues to descend with a slope consistent with a rate inversion occurring later this year or early next year. There is little danger of a recession before mid-2019 and until the unemployment rate starts to increase (chart below).

GAAP earnings and industrial production both continue to grow, so the economy is on a solid fundamental footing. No warning flags here.

Long-term technicals continue bullish:

This is how markets come back from a normal correction, not how bear markets begin (chart below).

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Oil looks set to rally. We are looking to go long if the technical situation continues to improve (chart below).

Recently, the dollar has backed off resistance at the 95 level and gold has risen to what is now resistance at $1300. The dollar could break out above 95, but with interest rates weakening, a drop down to form the right-shoulder (of a reverse head-and-shoulders) is a more likely scenario. If that happens, then we can expect gold to be supported and trade in the $1310-$1290 range until the dollar completes the pattern and starts rallying once again (chart below).

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The commitment of traders in the gold futures market, is a sentiment indicator with a strong correlation to the gold price. The two classes of trader that correlate most strongly (but in opposite ways) are the swap dealers and the large speculators or money manager class. The former, are considered the true experts in the market and their positions tend to correlate positively with the price of gold, while the money managers tend to be momentum players who are usually wrong at market pivot-points and, therefore, tend to correlate negatively with the gold price

The chart below shows that, as of last Tuesday, June 5, the swap dealers have moved from a net long position, to a net short position of -36K contracts. This shows that the experts expect to buy back their shorts at lower gold prices this coming August. The money managers, for their part, continue to hold a historically low net-long position. This indicates, that in the next several weeks, gold is likely to experience range trading, but with a greater potential for weakness further out in time.

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