Key Points

  • Rotation away from the market’s prior momentum darlings continues.

  • Friday’s jobs report had bullets for both the optimists’ and pessimists’ case studies.

  • Improving productivity, partly due to work-from-home trends, could persist as a positive economic driver.

Today’s report will look at the latest labor market data; but before we get to that, an update on the market is in order. My last report of two weeks ago focused on the narrowness of the market’s advance to new all-time highs, along with some of the troubling speculative froth being witnessed. Given the early weakness in the prior high-fliers as we start the holiday-shortened week, a brief update is warranted.

I concluded that late-August report with the following: “I worry about the signs of froth in the market and among some behavioral measures of investor sentiment; not to mention traditional valuation metrics that are historically-stretched. This is not an environment in which greed should dominate investment decisions; but instead one for discipline around diversification and periodic rebalancing.”

So where do things stand today?

In terms of “signs of froth,” small traders continue to dominate the options market. According to SentimenTrader, since mid-July, trades for 10 contracts or fewer have consistently accounted for more than 60% of all opening call purchase premiums, massively dwarfing larger trade sizes. Importantly, last week’s volatility did not discourage these traders; it did the opposite: they added to their bullish bets.

Rotation is likely to continue to characterize the market’s behavior. Year-to-date (YTD) through the end of August, we hit the widest spread since 1932 between the best (technology) and worst (energy) performing sector—76%—according to SentimenTrader. In fact, the only years since 1932 when the YTD-August difference neared or exceeded 50% were 1987 and 2000. Historically, the ratios between best and worst sectors tended to narrow after such wide differences in returns.

Conclusion: caveat emptor.