Market Likes the Jobs Number… For Now. Here’s the Problem

Posted 9:30 AM ET - – The S&P 500 has formed support just below the 100-day MA and yesterday buyers tried to push it above the down trend line that started a month ago. The selling pressure was fairly steady off of the high from Thursday suggesting that this might have simply been a debt ceiling relief rally. Today we will see if the reaction to the jobs report can push the SPY through resistance at $439. In September 194,000 jobs were created and that is well below the 500,000 that were expected. From a market perspective, “bad news could be viewed as good news” because it will encourage the Fed to stay “dovish”. From my perspective there is a component I watch closely and it is bearish. Hourly wages increased .6% and that is a relatively “hot” number. I have been expecting this and it is inflationary. There are 10 million unfilled jobs and employers are struggling to find workers. Wages are the highest input cost for companies and it will weigh on profit margins. The second highest input cost for companies is energy. There is a global energy supply shortage. China is rationing electricity and India has a few days of coal supplies left. It takes months for production to increase and these higher input costs are going to put upward pressure on inflation as producers pass on higher costs to consumers. China’s PMI’s were in contraction territory in September. China has a 10-month head start on the global Covid recovery and it could be a sign that global activity is starting to decelerate. Rising inflation and economic contraction are a lethal combination for stock prices. Credit issues in China are also surfacing and slowing economic activity will reveal the magnitude of the problem. Swing traders with a 3-4 week time horizon should stay in cash. I feel that the bounce this week was a relief rally and I will not aggressively buy stocks until I see a big market wash out down to the 200-day MA. Stock valuations (forward P/E S&P 500) have not been this high since the tech bubble in 2000 and analyst downgrades outnumber upgrades as we prepare for earnings season next week. Day traders should stay very fluid. Expect two-sided price action and don’t get locked into a directional bias. We should see a fairly wide trading range today and the futures have been all over the board since the release of the jobs report. If the SPY can’t close above $439 today I would view the price action as slightly bearish. If we can rally above the high from Thursday and we can close near $441 that would be bullish short term. Support is at SPY $429 Resistance is at $439 and $441.60 . .

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