January 4, 2019
Posted 9:30 AM ET - Yesterday the market tanked after Apple warned investors that earnings would not meet expectations. A few months ago this company had the largest market cap in the world and now it is down 40% from its high. Earnings season is upon us and other warnings might be pending. The S&P 500 is up 30 points before the open on positive news from China. These gaps higher have frequently been faded and the downside will be tested. Apple's news will cast a dark cloud over earnings season. Traditionally, stocks have rallied a week ahead of the announcements and mega cap tech stocks have fueled optimism. Last October 30% of the S&P 500 gains were attributed to Apple, Microsoft and Amazon. I doubt that we will see a big rally ahead of earnings season. Investors will be cautious and potential warnings loom. At a forward P/E of 14, stock valuations are reasonable. China announced that members of the commerce ministry will be involved in the trade talks held on January 7-8. They are serious about the negotiations. Caixin released the Chinese services PMI and it jumped to a six-month high (53.9). The PBOC reduced bank reserve requirements for the fifth time in a year and it plans to do more. China realizes that economic activity is slipping and they are doing what they can to curb it. The government shutdown continues and Democrats control the House. Trump is steadfast in his $5.6 billion demand for the wall and he will veto anything less. He wants Americans to know that he stands for border security while Democrats stand for open borders. The longer the shutdown lasts the louder his message gets. Over 75% of the government has been funded so this does not have a major market impact. Fed Chairman Powell will speak at an economic conference that starts 45 minutes after the opening bell. No one is expecting any material developments. If anything, his tone should be more dovish. The market has been in a steep decline since the last FOMC statement and Fed officials typically calm investor fears. Two rate hikes are expected this year. ISM manufacturing dropped more than expected and it weighed on the market yesterday. ADP posted a massive number (271,000 new jobs) for December. Seasonal employment could have inflated the results. The Unemployment Report this morning showed that 312,000 new jobs were created in December. I had to do a double take to make sure the number was right. This is a huge number. Hourly wages increased .4% and that is "hot". If this trend of higher wages continues the Fed will not take its foot off of the brakes. Strong employment and higher wages should be good for the economy, but we could be in "good news is bad news" mode. Trump will NOT be able to resist commenting and we can expect plenty of tweets. He wants to negotiate with China from a position of strength and this number certainly helps. Swing traders shorted the SPY at $247 yesterday. You should be able to cover the position for a small gain. Buy the SPY on the open, but don't go long. The news this morning is good and I am seeing signs of support. The market drops have not hit air pockets like they did a few weeks ago. Buyers are nibbling on the way down and the bid is building. Opening gaps higher have been faded and day traders should expect the same this morning. The market will NOT move higher until it tests the bid. The Caixin services number was much better than expected, but the manufacturing number was worse. Everyone expected high level trade talks with China so that is not new. The PBOC has been easing to no avail and most analysts expected them to continue. The jobs report was incredible, but wage inflation will temper the excitement because it keeps the Fed on its current path. How much of the job creation was seasonal? The news this morning is balanced. Use the first hour range as your guide. I believe stocks will retrace and the decline will be orderly and gradual. Once support is established I believe the market will rally. Support is at SPY $247/244/$240 and resistance is at $250/$251. . .
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