U.S. markets head for a week of losses as the June jobs report shows signs of a cooling labor market. Jeff Bierman, TheoTrade Chief Market Technician, joins Yahoo Finance Live to discuss the market adjustment to the possibility of additional Fed rate hikes, leisure, luxury, and travel stocks, as well as oil and commodities.
Video Transcript
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AKIKO FUJITA: Well, investors are shrugging off a weaker than expected jobs report with the S&P 500 at least in positive territory going into the end of the trading week. All three major indices still headed for a week of losses though. Our next guest says, the market is headed for a fast and furious correction after big gains in the first half of the year. Let's bring in Jeff Bierman, TheoTrade Chief Market Technician.
Jeff, we're going to get to the technicals in just a bit, but I'm curious to get your read on the market reaction to this data today. On the one hand, we've been talking so much about investor concerns around additional rate hikes coming and yet here we are today talking about a jobs report that essentially cements another rate hike come July, and the market's just taking it in stride.
JEFF BIERMAN: Well, it's a tug of war. The market's trying to figure out, is it going to be two rate hikes before the end of the year, or is it going to be one rate hike before the end of the year? So it's 92% chance as of today that they're going to raise rates at the end of July. But if the economy can cool off at a reasonable pace which it showed today because we've gone down from a jobs report of 306,000 in May to 209,000, that's a tolerable number for the fed to kind of deal with.
So the market's trying to come to grips with, is it one rate hike or two rate hikes? And if it's one rate hike, and the fed pauses the market might construe that as saying, well, we finally peaked and it's time for us to take off and start buying, and make a move higher, like higher and break out from this 4,400 level.
So I just think the market's sort of in between this hem and the heart trying to figure out what's going on. So the immediate jerk reaction was to pull back, and then to steady the ship, and then to come back and rally because it's not that bearish, but then again, it's not that bullish. So indecision leaves it where it's at, and you see that on the tape today.
AKIKO FUJITA: Let's talk about where things are headed now in the second half of the year because you've laid out this narrative for the market, the lifestyles of the rich and famous, break that down, what do you mean by that?
JEFF BIERMAN: Yeah. Awe to Robin Leach out there if you can remember far back as I can. But listen, there have been three sectors driving the market for the better part of this year. And for good reason Akiko, good reason. The tape has been strong since January, it's the wealth effect. I mean, the market becomes an ATM machine to a lot of retail traders, even a lot of institutional traders. So it's been driven by technology, it's been driven by leisure, and it's been driven by travel and lodging which includes airlines and hotels.
So if you can see people are feeling it. They're not really out there saying, well let's go to the discount merchandiser, or let's go to Costco or Walmart, those things have actually been running in place. And even some stocks they were tagged like Levi got nailed 5% down today because the average person's not out there shopping for clothes. People are shopping for big ticket items Akiko so you're seeing the big run off and let's say, I've got to own a new iPhone, I got to take a trip to Greece, and I got to fly on United, and I'm going to grab myself a Norwegian cruise, or Royal Caribbean cruise out in Greece, and I'm going to buy myself an expensive watch.
People are spending based upon how wealthy they feel on, based on the backdrop of the market. But the problem with that is, is easy come easy go, is psychology because we're so overheated in these particular famous lifestyles of the rich and famous stock. I mean, they've overshot so horribly that when they start to come down to Earth, it could create a very fast and furious correction.
I'm not calling for a meltdown, I'm just calling for get ready for what could be one quick drop back in the market and then maybe a quick bounce back. So be aware, Royal Caribbean, Marriott, United they've all way overshot their expected moves. They are trading outside three standard deviation channels, which is just very unusual, and they just haven't seemed to give in just at all because of the performance chasing by investors who've reaped the benefits of the market in these three sectors.
AKIKO FUJITA: Well, you could argue that we're already starting to see some of the cracks in those trades you just pointed to, particularly, on the tech side. But what do you think is going to be the big catalyst that moves that chart to the downside?
JEFF BIERMAN: I think, one of the things that you saw today, and it's very subtle, and it's where I've positioned myself is in oil. Oil has been a lagger all year long. It's like people just don't want to touch it. But oil is more or less a function of supply and demand with OPEC. And OPEC has been consistently cutting. But if the demand side can come up to meet it, that could put upward pressure on inflation.
The fed will look at this and say, oh, you know what? If there's upward pressure on inflation from raw materials, that could restrain investor spending, and that could pull back the market and start to get those high tech stocks, and also the leisure and lodging stocks, rolling down because the rotations will start towards more of the lagging value plays, away from the high octane, high multiple growth plays. So I think it might be some unexplained pop in oil or raw materials that could get people on their heels.
AKIKO FUJITA: Bond yield is certainly a good indicator of where things are headed. At least, in the macro picture we saw a bit of a pullback today on the shorter end of the yield curve on the back of the jobs report, but what's the big number that you're watching right now, that could signal additional pullback?
JEFF BIERMAN: I track the inverted yield curve as-- pardon me, I track the inverted yield curve as much as anybody does here, but I think when we start to get to that four or five handle on the S&P, pardon me, on the 10 year treasury, it's going to start to get toppy at that point. I don't think the fed wants it to go beyond a 4 and 1/2 handle, So there are going to be very careful to be data dependent, read the data, ratchet up interest rates.
But I think there's a restraining number at around that 4.5 handle on the 30 year treasury. So I would keep that in mind, that should be the next step, leap forward as we start to move up. And if we can take that out, the 4 and 1/2, that will definitely put pressure on the high multiple stocks. That will definitely do that. But if we fail at the 4.5, that actually will be bullish for stocks because we'll indicate at that point the fed may be done with its raising rate type of program.
AKIKO FUJITA: So the second half of the year you see a fast and furious correction, what's the defensive play? What are investors hide out? What sector?
JEFF BIERMAN: One place that's been lagging horribly is pharma. Some of them trade at single digit multiples, things like Pfizer, which has just been left for dead, Bristol-Myers which has been avoided like the plague. Today, Merck is coming down. Merck got hammered today, but for good reason Merck trades at a very high multiple. But I do think health care is going to be a place to park your money in the second half of the year, Akiko.
And on the same note, I think you're going to be able to park your money in energy stocks. The yields are phenomenal, the PE ratios of the average oil stock are in single digits, which I haven't seen for a very long time. So I've shifted a lot of my funds, tactical asset allocation towards energy, and towards health care.
And it's away from tech, and away from travel and leisure. So I think the market will start to even itself out starting as we move seasonally into that August, September sort of that boogeyman seasonality time frame. So be aware that this overbought condition will eventually be worked off, it's just nobody's going to ring the bell when it happens.
AKIKO FUJITA: Some good takeaways there. Jeff Bierman, TheoTrade Chief Market Technician, appreciate the time today.
JEFF BIERMAN: Thank you very much for having me.
