Weak Jobs Lift Stocks, but Inflation and Low Volatility Keep Risk in Focus

The labor market came in much weaker than expected, and stocks actually liked it because weaker employment reduced pressure on interest rates. Nonfarm payrolls fell by 23,000 jobs when expectations were for an increase of 83,000, roughly a 100,000 job swing from expectations. The unemployment rate fell 0.1% to 4.1%, but the labor force participation rate dropped to 61.4%, down 0.7 percentage points since January. As a result, part of the decline in unemployment reflects people leaving the workforce.

The revisions were also significant. May saw a decline from 129,000 jobs added to 63,000, and June followed with a decrease from 57,000 to 20,000. That removes 103,000 jobs from the previous two months. Hourly earnings also showed the slowest annual wage growth in years.

That weakness changed the interest rate picture quickly. The probability that the Federal Reserve does nothing at its September 16 meeting is now 58.1%, while the probability of an increase is 41.9%. Just three or four days earlier, the probability of an increase was around 70%. Now inflation becomes the next major test. If inflation comes in neutral or lower, that strengthens the case for rates staying unchanged. If inflation comes in hot, the market may have to rethink that.

The S&P 500 Index (SPX) gained about 0.6%, and I still think there could be more upside before this market stalls. The first level that matters is 7,800. That is the major resistance the market recently pulled back from. If 7,800 breaks, the next major resistance does not appear until around 8,100, with 8,000 to 8,100 becoming the next important zone. If we reach that area, that is where the short side becomes much more interesting.

The U.S. Dollar Index (DXY) fell after the jobs report, which helped stocks, but it recovered and held above key technical support. The 10 Year U.S. Treasury Yield (TNX) also moved lower initially, which helped both stocks and gold, but it recovered from its lows. That tells me inflation is still hanging over this market. Expectations for another Fed increase have fallen, but inflation is keeping longer-term yields from dropping more aggressively.

The CBOE Volatility Index (VIX) is another thing I am watching closely. Once the VIX gets below 15, complacency starts becoming a concern. It can certainly go lower. We saw it around 12 in December 2023 and again in May 2024. But eventually, volatility comes back. A move into the 14s, 13s, or 12s gets my attention because the VIX can eventually rebound toward 20 to 25, sometimes 30, and in more extreme conditions even 50. That does not mean stocks have to fall immediately, but it does mean I do not want to become overly comfortable as this rally continues. The iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) also becomes an interesting, although high-risk, volatility setup if the VIX keeps falling.

Gold (XAUUSD) had another strong move after breaking out of its wedge, but it has now reached important resistance at $4,375. That is the level gold needs to break for the next leg higher. I would not be surprised to see some hesitation around $4,375 ahead of inflation data. From there, inflation could either push gold back down or provide the catalyst for a breakout.

Silver (XAGUSD) also rallied strongly, but it ran directly into $64. I still need to see Silver clear $64 and confirm above it before treating this as a real breakout. Until then, it can still be viewed as a retracement into resistance and the descending trend line.

Crude Oil (WTI) moved slightly lower, while Natural Gas (NG) gained about 1.4%. Neither move changed the larger picture in a meaningful way.

Technology is giving us a mixed setup. Microsoft Corporation (MSFT) reached a gap fill and formed a long upper wick, which is a bearish reversal signal. Oracle Corporation (ORCL), on the other hand, is developing a rounded cup with what could become a handle. If that structure continues into the middle of next week, Oracle could be setting up for another move higher.

NVIDIA Corporation (NVDA) has also bounced strongly after holding its major rising trend line. There could still be more upside, with $250 representing the maximum upside reference. I do not necessarily expect it to reach $250, but if it does, that becomes a very interesting short level.

Space Exploration Technologies Corp. (SPCX) gained more than 15% and continues recovering after a sharp post IPO decline. It initially reached $225 on the third day after the offering, then collapsed to approximately $105 before beginning this recovery. That rebound, along with NVIDIA, shows that bullish risk appetite is returning.

Bitcoin (BTC) is one of the cleaner short-term setups right now. It has broken out, but it has not made a massive move yet. As long as that breakout holds, I am looking for Bitcoin to break $67 and move toward $71 to $72 in the near term. If it falls back below the breakout area, then the breakout has failed.

I remain more bullish on Bitcoin in the short term because bearish sentiment is still heavy, but I still do not believe the larger cycle low is in. So I can be bullish over the next couple of weeks while still expecting lower prices later in the larger cycle.

That is really the balance across this market right now. The S&P 500 still has room toward 8,000 to 8,100 if 7,800 breaks, gold needs $4,375, silver needs $64, Bitcoin needs $67, and technology still has pockets of strength. There is upside available, but with the VIX moving deeper into complacency and inflation still keeping pressure on yields, this is a market where patience and price discipline matter more than chasing.