In the January jobs number it’s the upside surprise that counts

Not just a good U.S. jobs number for January this morning but a surprisingly good jobs number. The U.S. economy added 243,000 jobs in January, up from a gain of 220,000 jobs in December. The private sector added 257,000 jobs in the month. Over the last three months the U.S. private sector has added 655,000 jobs.

Economists analyzing December’s data had pointed out that about 40,000 temporary workers hired by UPS and FedEx in December to delivery holiday packages would probably be let go in January. That would put a big drag on the January jobs number, economists reasonably concluded. Going into today’s release from the Bureau of Labor Statistics, economists surveyed by Briefing.com were expecting nonfarm payrolls to climb by 168,000.

The January jump in jobs looks to be connected to a recent drop in layoffs. Read more

I’ve been waiting to see how long these guys would hold out.

Turns out Groundhog Day is their limit.

And I think that gives us some help in figuring out how long the current rally is likely to run.

Chief economists and investment strategists at the biggest global banks went into 2012 with bearish calls for the first half of 2012. (As I did—and do.)

But after the MSCI All-Country World Index (ACWI) was up 5.7% for January and the U.S. Standard & Poor’s 500 Stock Index was up 4.5%, they’re reversing course. Now they’re calling for the rally to continue.

A good example is the comments from Thomas Lee, chief equity strategist at JPMorgan, in an interview with Bloomberg on January 31. “Investors had gotten just too bearishly positioned” at the end of 2011. “Investors need to go from defensive to cyclical exposure. That’s going to be something that takes time.”

There’s nothing wrong with changing your mind—especially when you have new data. (One of my favorite investing quotes comes from John Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?”)

And forecasting markets and economies is tough work so I’m not making fun of these calls.

But I am interested in them as a measure of sentiment. Markets go up when money sitting on the sidelines changes its mind so the shift from bearish to bullish by big bank strategists is certainly a boost to the current rally. If bank strategists are now bullish when they were bearish, it’s a reason, in itself, to think that this rally will run for a while yet.

So when might it run out of steam? Read more

What’s the fuel that’s been driving the December/January rally?

Can’t be macroeconomics that’s for sure. The World Bank just cut its forecast for 2012 global economic growth to 2.5% from 3.6%. Sure can’t be Europe, where the Greece continues to slide toward default while the region as a whole slips into recession.

Hard to generate a torrent of optimism from fourth quarter U.S. earnings where banks have struggled to beat radically lowered expectations and where more than 40% of the 44 Standard & Poor’s 500 companies that have reported fourth quarter earnings have missed Wall Street estimates.

So what is fueling this rally?

I think the data makes it very clear—it’s the conversion of skeptics into, if not optimists, at least into market neutrals, of short-sellers into short coverers, of stock mutual fund sellers into mutual fund buyers, and of bearish market gurus into bullish market gurus.

Which, of course, raises this question: What happens when there are no more skeptics? Read more

Have we been here before?

It feels like those days in 2011 when the U.S. stock markets were the best performers in the world. But this isn’t just a replay of 2011. There are significant differences.

In 2011 U.S. stock markets beat all the other major markets in the world.

The overall absolute performance for 2011 wasn’t all that great: The Standard & Poor’s 500 Stock Index climbed just 1.2%. But the relative out performance was stunning: For 2011 emerging markets (as tracked by the iShares MSCI Emerging Markets Index (EEM)) was down 18.8% and the world’s other developed markets of Europe and Japan (as traced by the iShares MSCI EAFE Index (EFA)) was down 12.2%.

This January looks remarkably similar so far. Europe has continued to sink—iShares EAFE is down 0.77% for 2011 through January 6. Emerging markets are doing better with the iShares EEM up 0.75%. But the U.S. Standard and Poor’s 500 is up 1.76%.

The driver for the out performance of U.S. stocks in 2011 was been the ability of the U.S. economy to exceed expectations. While projections for growth in the EuroZone and in emerging economies have been falling, U.S. economic data, while not in absolute terms all that great, have exceeded expectations. Job growth of 200,000 in December may not be enough to cut unemployment significantly (especially when you factor in the 40,000 or so seasonal jobs delivering packages at FedEx and UPS that were added in December but will get subtracted in January), but it did beat consensus expectations of 150,000 net jobs for the month and the November figure of 120,000 jobs.

Economists have expressed worries that while U.S. economic growth will come in at 3.5% or so in the fourth quarter of 2011, it will drop back to 2% in the first quarter of 2012.

Investors, however, have been more than willing to overlook those reservations to ride the hot momentum hand in the first week of 2012. For example, home building stocks, one of the most battered groups in 2011, are among the best performers of 2012 so far. And the more battered a stock was in 2011, the bigger the gain in 2012. DR Horton (DHI), for example, was up 6.96% in 2011 and it’s up another 2.93% in 2012 through January 6. But PulteGroup (PHM), which was down 16.09% in 2011, is up 12.52% in the first days of 2012.

And it’s this speculative optimism that makes the first days of 2012 different from the relative out performance of 2011. Wall Street analysts have turned decidedly negative on earnings as we begin earnings season with fourth quarter forecasts now calling for just 6.9% year-to-year earnings growth and an even skimpier 3% forecast for the first quarter of 2012.

For the rally that has begun 2012 to have some legs, we’ll need to see some other sectors to add their bit to the housing-generated momentum. Technology is the best chance. Today momentum favorites F5 Networks (FFIV) and Broadcom (BRCM) are up 4.3% and 2.8%, respectively, as of 2:15 p.m. New York time. (F5 Networks is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/the-jubak-picks/ .)

If other momentum plays join in, this rally might run for a while, but rallies built on momentum make me nervous. They tend to end dramatically—if the momentum doesn’t get support from economic fundamentals.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. F5 Networks is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/the-jubak-picks/ . The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares in F5 Networks as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

U.S. stocks break out of their trading range–unfortunately to the downside

Yay, U.S. stocks have finally broken out of their trading range!

What? Oh, they’ve broken out of the range between 1215 and 1295 on the Standard & Poor’s 500 stock index to the downside?

Well, then Boo!

If you were hoping that the big October move to the upside was a true rally that might be about to end the bear market that set in this summer, then the bad news here is that with the break down through 1215 to 1193 at the close in New York the October move was clearly a bounce and we’re still in the paws of the bear.

That doesn’t mean that we can’t get another bounce. In fact I think the odds are pretty good that we will. And relatively soon.

There’s very solid support at 1183 (a 50% retracement of the October move, any good technical analyst will tell you—as they have told me), and then again at 1179 and 1176. The market is oversold. Today’s bad news is so bad that it could wash out a lot of the remaining borderline bulls. And we could get a bounce from here.

But the key take home lesson from today—the lesson to remember if we do get a bounce—is that even if the bounce is as substantial as October’s it is still just a bounce in a market that is in a downward trend. Read more