Soft Economic Numbers This Week
The jobs report Friday could be weak. Here’s why.
PRE-OPEN MARKET COMMENTS THURSDAY – In the last 3 weeks the market has been able to rally above the major moving averages and it has discounted the potential for a credit crisis. During that time the volume has only been above the 20-day average one day and that was last Friday when the activity was inflated by end-of-quarter “window dressing”. I don’t trust this rally.
Domestic economic numbers have been soft this week (ISM manufacturing, ISM services, JOLTS and ADP). This morning initial claims came in at 228K. That was higher than expected and it follows a fairly high 246K last week. This year initial jobless claims have been averaging below 200K. This is a considerable uptick and it is consistent with the JOLTS report and ADP. I believe the jobs report tomorrow could come in below 200K (240K consensus). Hourly wages are expected to increase .3%.
The official EU PMIs have been released and they hit a 4 month low. China’s Caixin manufacturing PMI was flat and that could be a sign that the reopening backlog from the Covid-19 shutdown has already run its course. Japan’s Tankan survey was flat. In aggregate, this is not a robust backdrop.
Next week the CPI will be released and that will be an important number.
Why does all of this matter? Most analysts have been pricing in a “soft landing”. The market has staged a light volume rally and we could see profit taking if the economic numbers start to falter. Tuesday industrial stocks dropped on recession fears. I expect to see follow through in that sector. The sentiment will shift from bullish (“the Fed will stop tightening soon”) to bearish (“the Fed has gone too far”). Since I am expecting a weaker than expected jobs report does that mean I am buying puts today? No. The jobs report has been strong recently and this could be viewed as a “one off”. The first couple of weak reports could also be interpreted as “bad news is good news” because it will prompt the Fed to take its foot off of the brake.
In two weeks, earnings season will kick off and we will hear from banks. That could shed light on recent credit issues. In his annual letter, JPMorgan Chase CEO said, “The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come.” But importantly, recent events are nothing like what occurred during the 2008 global financial crisis,” he added in the letter released this morning.
This light volume rally has not changed my neutral to slightly bearish bias. I still believe that swing trades need to be very short term in duration spanning only a few days. The bounce looks great, but previous light volume moves like this have reversed and I still believe we will stay in this sideways range through summer.
Day traders should be very patient today. Do not chase the open and error on the side of not trading today. The S&P 500 dropped 20 points since the initial jobless claims number and the sellers from Tuesday have returned. 1OP was as flat as a pancake into the close Wednesday so it will not help us on the open. We are likely to see early selling. Let it run its course and watch how we get to the low from Wednesday ($405.88). If we chop our way down to that level with mixed overlapping candles and light volume, it is likely to hold and this will be a pre-holiday “inside day”. That means you trim your size way back. You should expect a low volume “inside day” and that is a LPTE. I hope we are pleasantly surprised and that we breakout of that range on volume with nice stacked candles. If the first move of the day takes out SPY $405.88 with easy (stacked reds) and volume, we could have a nice shorting opportunity. If the day wears on and Wednesday’s low is intact, look for a recovery during the day. Holidays tend to have a bullish bias. Watch for support and a higher low double bottom.
Expect the worst (low volume “inside day”) and prepare for the best (easy breach of Wednesday’s low on volume).
Support and resistance are the low and the high from Wednesday. We will be lucky to trade outside of that range today.
Happy Holiday everyone! I hope you enjoy the long weekend.