Weak Jobs Report Does Not Spoil Bounce – Bad News Is Good News

Posted 9:30 AM ET - The market continues to bounce off of the lows from Monday. It has cleared the 200-day and 100-day moving averages and the upward momentum is strong. Stocks were deeply oversold and this bounce still has a few more days left in it. Fed officials have been dovish and that has been the primary catalyst for the rally. The market has priced in two rate cuts this year and I believe that is overly optimistic. If global economic conditions continue to slip we might see the first rate cut in September. The economic releases this week have been soft. ADP reported that 27,000 new jobs were created in the private sector during the month of May and this morning the Unemployment Report showed that 75,000 new jobs were created in May. These numbers are a light, but they follow gangbuster numbers the previous month. Many traders will rationalize that the average between the two months is still good. Weakness in the labor market might prompt the Fed to ease sooner (bad news is good news). I think the selling pressure will be pretty contained today, but the news was not good. ISM manufacturing came in at 52.1 and that was low. Fortunately, ISM services came in at 56.9. That was an incredibly robust number and 80% of our economy is based on services. Overall, the numbers had a negative bias and there could be kinks in the armor. Global economic conditions continue to slide. Germany lowered its growth projections for 2019. They halved their previous projection and now they believe growth will only hit .6%. This is the fourth-largest economy in the world and they also reported that exports declined 3.7% in April. The rest of Europe is struggling as well. Germany, England, France, Italy, South Korea, Japan and Taiwan all reported manufacturing PMI's under 50 this week (contraction). There is a glimmer of hope that the US and Mexico will reach an agreement. Tariffs are likely to be imposed Monday, but the talks have gone well. Mexico closed its southern border with Guatemala. Trump wants action, not words. Illegal border crossings have hit record levels and the border patrol is overrun with immigrants. Mexico does not want a trade war with the US. The head of the PBOC said, "we have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and also for the fiscal, monetary policy toolkit, I think the room for adjustment is tremendous." This sounds like a country that is prepared for a prolonged trade war with the US. The tone has been civil and Mnuchin will meet with Chinese central bankers this weekend at the G20 finance conference. Trump and Xi will meet on June 28th. We will not see a trade deal with China before the 2020 election. China's central bank has lots of tools, but the shadow banking industry is unregulated and it has $20 trillion worth of exposure. A prolonged economic decline could expose loose lending practices. Mega cap tech stocks have been leading the market rally and they are facing antitrust scrutiny domestically and abroad. The market needs these stocks if it's going to move higher. Swing traders are short the SPY at $280. This is a longer-term position and we are going to hold with a wide stop at the all-time high. We will weather this bounce and wait for the next leg lower. Day traders should continue to ride the market higher. The momentum is strong and we have to wait for the rally to stall. The price action was very compressed yesterday for most of the day. We saw a late day surge higher on news that talks with Mexico were going well. I will be watching for tight trading ranges during the day and dojis (open equals close) on the daily chart. This will be a sign that the momentum has stalled. Next I will be watching for late day selling and follow through the next day. These price patterns will signal that the next leg lower is about to start. Until then, favor the upside. This is only a bounce from deeply oversold conditions and it will last a few more days. The next big move is down. . .

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