Comments from Powell were hawkish and that is weighing on the market.
PRE-OPEN MARKET COMMENTS WEDNESDAY – The market tested the major moving averages last week and it bounced. Now we are likely to test them again and this time sellers will have a running start. Powell’s comments yesterday were particularly hawkish and the odds of a 50 basis point rate hike shot up to 80%. “The Street” had been pricing in a 25 basis point move. He also stated that they will consider additional tightening if it is warranted.
ISM manufacturing was a little light last week, but ISM services came in at 55.1 which is a strong reading. Last week, China’s PMI hit the highest level in a decade (52.6). That is squarely in expansion territory, but much of that rebound is due to pent up demand during their Covid-19 shutdown.
ADP came in fairly strong and 242K new jobs were added in the private sector during the month of February. I am expecting a good jobs number Friday since initial jobless claims have been low the last four weeks. Does that mean the market will rally on the news? No. The Fed has been leaning on strong employment to justify their aggressive tightening. Strong jobs reports increase the chances that they will stay on the tightening path. The good news is that the economy has been able to shoulder the interest rate hikes so far. The key to the jobs report is hourly wages. If they come in higher than .4%, that will be bearish for the market. This is the largest input cost for companies. The Beige Book will be released later today and it will provide a glimpse of regional economic growth.
The CPI will be posted in a week (March 14th). That will be closely scrutinized and it is the next potential market speedbump or catalyst for a bounce.
The ECB is likely to raise 50 basis points on March 16th.
Today, Fed Chairman Powell will testify before Congress and we are likely to get another splash of cold water. The Fed is hawkish and they are not mincing words.
Earnings estimates for the S&P 500 have been lowered to $223 for 2023 according to Fact Set. This translates into a forward P/E of 18 and that is fairly “rich”. Stocks will need time to grow into current valuations.
Swing Traders, we will stay long the core position from SPY $409. The market tested the 200-day MA and it bounced. It could be tested again in the next two weeks. The CPI and the FOMC statement will be important. I am still neutral to slightly bullish. I favor selling out of the money bullish put spreads and I really like selling OTM naked puts on stocks I want to buy. That is a way to generate income while the market is in this bottoming phase and the strategy will force me to buy stocks I want to own at lower prices. That is one method for gradually scaling into long positions.
Day traders should favor the downside. If we see stacked red candles on heavy volume after Powell starts speaking, you can be fairly aggressive with your shorts. This would push us well below the 50-day MA. I am not expecting this. I believe the fireworks are over for now. Typically after a big market move, we get a day of rest. Buyers will try to defend the 50-day today. Sellers will have a running start at the 200-day MA and I believe it is going to be tested. We are more likely to see the next leg lower Thursday. There will be nervous jitters that the jobs report will be solid and that it will provide the Fed with more cushion to hike rates. If the next leg lower does not come Thursday, it will come Friday on a decent jobs report. That move lower could be fueled by traders who are worried about the CPI Tuesday. Either way, I am expecting a pause today and then follow through selling into the end of the week. This bounce was instantly slapped down and the likelihood of a 50 basis point rate hike has increased. That is a material change.
Support is at the 200-day MA. The 50-day MA is right at this level. Resistance is the high from Tuesday.