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Fed, ECB Still On Hold During Difficult Transitions

Friday's 115k increase in nonfarm payrolls was "disappointing," "worse than expected" for the second month in a row, sending SPX down -1.6% to 1369, it is now 1350.

A very subpar recovery in employment hasn't prevented a very strong 3-year bull market, with SPY up 119% at its peak, greatly aided by extraordinary Fed policies, as I wrote Apr 29.

What has changed since Apr 3-4 is that financial markets believe the Fed and ECB are on hold, which continued at last week's ECB meeting. Not coincidentally global stocks topped Apr 2, see my Apr 16, Apr 5.

Since then, bulls' "heads I win, tails you lose" game of good news is good, and bad news is okay, hoping key central banks ease even further, see my Mar 27, that drove the Oct 4 rally has not worked.

Except in China since April 4, whose stock market not coincidentally has risen. Other emerging market central banks are easing, that hasn't yet stopped significant downtrends in EEM, BKF, see charts below.

In the U.S., more experts are saying housing has bottomed. ITB home construction and IYR REIT etfs have been doing well, giving bulls some hope that the expansion might become more self-sustaining. XLK tech has weakened recently, with the Facebook roadshow just starting.

Bulls hope housing and strong auto sales offset the disappointing employment numbers, pointing out the seasonal adjustment issues with a warm winter and Easter, and the +/- 100k margin of error.

The bulls' case would be that, as long as earnings growth seems okay, up 7-8% in 1Q, interest rates remain extremely low, Europe stays contained, a big if, it's possible that the market p/e rises some time in 2012 closer to its long-term average.

But timing is difficult. As I wrote April 23, the three major regions are in the middle of trying to make their own key transitions, which don't always go smoothly, again most obviously in Europe. Those are to a:

"1) more stable financial situation in Europe; 2) more self-sustaining economic recovery in the U.S.; and 3) more sustainable basis for [continued high] economic growth in China."

European politics in the news is not surprising. On Feb 7, I wrote "Will Europe Tail Risk Shift to Political Unrest from Policy Making," on Feb 23, "Greece Deal, Eurozone Austerity in Race with Economy."

So my ongoing advice for months has been that whenever VIX gets low enough, perhaps below 16, then consider it an opportunity to hedge with cheaper puts. I.e., hedge when you can, not when you have to.

LEFT CLICK on charts to enlarge. Relative strength, top panel of each chart, is to SPY, except SPX and ACWI, which is to LQD, investment grade corporate bonds. Bottom panels show rate of change over 5 and 21 days, i.e. one week and month of trading day, which strongly impact the mood of traders about a security, i.e. have they been making or losing money.