James Trescothick

With more than 20 years of experience in financial service industry, James is our Senior Global Strategist and the co-producer and presenter of easyMarkets educational videos. When he is not working on educational programs or preparing webinars, you can find him with the easyMarkets team giving seminars around the world.

Friday started as a normal day to most people but traders were bracing themselves for a busy day. On this day, they expected the Bureau of Labor Statistics (BLS) to release the monthly jobs numbers.

At 8:00 AM, the bureau released the data that smashed analysts’ expectations. The unemployment rate remained unchanged at 4.1% while the non-farm payrolls (NFP) increased by more than 200K people. Wages had the biggest gains in more than 8 years.

When the markets opened, things were not as expected. As shown below, the US treasury bonds were at the highest point in three years. Remember, rising yields is usually a sign of increased risks in the market.

The stock market, which ordinarily would have gone up on positive economic data started going down. On Friday, the Dow lost 666 points and on Monday, it lost more than 1,500 points. Today, the futures show that the market could open more than 1,000 points.

A while back, I did an article on S&P 500 in which I argued the index was overbought and would see a short-term correction. In the article, I used the Relative Strength Index, which was above 80.

Using the same RSI for the Dow, NASDAQ, and S&P shows the three indices are currently oversold and could make some gains when the panic among investors fade away.

Dow Jones

S&P 500 and NASDAQ

As shown above, all the indices are sharply oversold using the RSI indicator. Other oscillator indicators show the same thing.

According to an old saying in the stock market, traders should always be greedy when others are fearful and fearful when others are greedy.

While I believe a major recession will come, I believe that this is not the time. Here are the reasons.

Corporate Earnings

Historically, when markets crash, it is usually as a result of a major trigger in the stocks market. This trigger is usually a sharp drop in corporate earnings or a fundamental challenge in the performance of companies.

Remember, the financial crisis of 2008/9 happened mostly because of the collapse of the housing market, which led to the collapse of Wall Street banks like Lehman Brothers and Bear Sterns.

This time however, corporate earnings have soared and firms have announced huge profits and improved their guidance.

Economy

The economy is doing well. As I mentioned above, the economy is doing well and all estimates show that it might get better. More people are now employed, wages are increasing, manufacturing is doing well, and inflation is contained below 2%.

The current sell-off is because investors anticipate inflation to start moving up as more people get money in their pocket. However, this is just a perception, which has not happened yet.

Panic

Finally, I attribute the current sell-off to panic among investors. As you recall, investors have made billions of dollars during this Bull Run. A minor trigger in the market has caused a major sell-off. This works in a similar manner to a balloon, which bursts faster when it is highly inflated. Ultimately, I believe the investors may soon move to buy the dips, which could see the market continue its upward moves.

Sources:

https://www.cnbc.com/2018/02/05/cramer-dont-panic-find-the-sell-offs-opportunities.html

https://www.marketwatch.com/story/volatility-futures-traders-arent-panicking-yet-2018-02-05

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