Fears Of A Bad Employment Number Are Getting Priced In – Support Will Be Tested This Week!

The market is trying to climb a "wall of worry". Yesterday, we started off on a very positive note and stocks rebounded after a massive selloff Friday. By midday, the volatility returned and prices whipsawed into positive and negative territory. By the end of the day, we finished with marginal gains. This morning, M&A news should have sparked a rally. Berkshire Hathaway paid a huge premium for Burlington Northern and Black & Decker merged with Stanley Tools. Deals are getting done at current price levels, indicating reasonable stock valuations. Tomorrow, the ADP employment index will be released. This will provide a preview to Friday's Unemployment Report. Analysts are expecting a drop of 190,000 jobs. That is much better than the 254,000 jobs lost in the previous month. Initial jobless claims have been dismal the last four weeks and the consensus estimates are overly optimistic. Nervous trading has set in and disappointing results are getting priced into the market. ISM services will also be released tomorrow. The service sector accounts for 80% of our economic activity and it is a crucial number. Consensus estimates call for 51.5. That is an improvement from 50.9 last month and it indicates economic expansion. Given the nice beat in ISM manufacturing yesterday, I believe tomorrow's number could be positive. Wednesday afternoon, the FOMC will release its statement. They want to keep interest rates low for as long as possible and I do not believe they will change their rhetoric. That will provide support for the market. Traders might wonder if the Fed had a sneak peek at Friday's number and decided to keep the language the same. Consequently, the FOMC won’t spark a rally, it will just provide support. The market is nervous and profit-taking has set in. We are likely to see selling into Friday’s number. However, I believe support will be established Friday or early next week. Earnings have been excellent and interest rates will remain low. As long as economic numbers don't deteriorate, we should be able to rally into year end. Fears of a double dip recession need to fade this week. We have seen the highs for 2009 and I believe we will trade between SPY 102 - SPY 110 the remainder of the year. I am lining up strong stocks and I am selling out of the money put credit spreads. I currently have 25% of my desired risk exposure and I will add aggressively once I see support. The market has stabilized and Asset Managers who are under allocated will start nibbling at current levels. Look for quiet, choppy trading ahead of a busy day tomorrow.

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