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Why the jobs report points to the beach

The growing strength in job creation isn't likely to cause the Federal Reserve to taper faster or discuss higher rates at the June 17-18th meeting. So, what does that mean for the market?

We now know that the April jobs report was NOT a miscalculation. The May jobs report at 217,000 now puts the three-month average at a healthier 230,000 jobs — much better than it has been and now more likely to continue to show steady improvement over the coming months. BUT — even though payrolls are hitting all-time highs, the job market is a far cry from where it was pre-crisis. Well-paying jobs continue to be replaced with lower wage/temporary jobs so the Fed will continue to proceed with caution, allowing the taper to continue while talk of interest-rate increases will remain on the back burner.





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Let's revisit the reason the Fed has maintained such ultra-low rates in the first place. In the wake of the Great Global Financial Crisis (GGFC), unemployment soared and the economies around the world contracted, forcing all of the major central banks to take dramatic steps to avoid a global financial system failure. Here at home, the Fed took dramatic steps to prevent another Great Depression. Since their first dramatic move in March 2009 (QE1) The U.S. economy has recovered from its post-crisis downturn, the S&P 500 has more than doubled since the depth of despair but growth remains sluggish in the 1.5-percent to 2.5-percent range with little threat of inflation. Since growth would likely contract to near zero (or below) if the Fed were to normalize rates, I continue to believe that they will proceed with great caution and will continue to maintain a low-rate policy until sometime late 2015 or early 2016.

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"But," you say, "the data are improving!"

Yes, the data are improving slowly and sporadically — exactly what we have all been hoping for and exactly what the Federal Reserve has been expecting. So, if they have been expecting this, why would anyone think that they will now change course just when it is starting to kick in? Janet Yellen has made it clear that the Fed will complete the taper by October, which means $10 billion a month for the next four meetings. She has also maintained that interest rates will remain at artificially low levels until she is sure that the recovery has taken hold and is well rooted. Since the data are not explosive enough yet, she and her "teammates" may continue to debate the pros and cons. But she remains convinced that the data do not suggest that we are in danger of "runaway inflation," a housing bubble, an equity-market bubble or any other bubble for that matter.

With the market currently trading at about 16 x earnings, it is not undervalued but nor is it overvalued. So, in an environment that is improving so what do you do?

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The long-term investor should stay the course. Equities have a place in your portfolio and if you stay the course, tweak the plan and make the proper adjustments when necessary, it will all work out. An ongoing assessment of conditions, beliefs, assumptions and policy is a reality and one that should command your attention on a regular quarterly basis.

For the proprietary/day trader, that's a bit more challenging right now. The VIX is at all-time lows, stability has created a sense of complacency which in turn mutes volatility — good for the long term investor but frustrating for "the trader." The trader will be forced to look at individual names vs. broader market plays as they look for individual stock mispricings vs. market mispricings. Internal rotations as we have seen lately — growth names, small/midcap names — will continue to provide the opportunity for the trader. Stocks that get oversold or overbought beyond reason are always the ones that the trader is on the watch for.

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We are now fully engaged in the "dog days of summer." Traders are better advised to not "create" a situation where none exists. That usually ends poorly. As volumes typically subside during the summer months, realize that the LACK of any catalyst may "create the opportunity" to go to the beach. Have fun!

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Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.

Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.