Gobal Money Flowing Into US Stocks. Bad Jobs Report Might Not Matter. Let’s See

May 2, 2013
Author: Peter Stolcers, Founder of OneOption
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Pete

Yesterday, the market pulled back on weak economic news. The damage was contained and stocks are rebounding today.

After a month of dismal economic releases, you would expect to see some selling pressure. ADP employment missed by a wide margin and the market shrugged off the news. Mixed comments from the FOMC sparked a little selling. They did say that the risk of an economic slowdown is elevated.

Initial jobless claims dropped by 18,000 this morning and it came in at the lowest level in five years (328,000). This is the second good week in a row, but this number is volatile. Traders have been willing to ignore disappointing economic releases the entire month. They point to a seasonal adjustment a year ago and until they see a downward trend, they will embrace this rally.

I believe that even if the jobs report comes in below 100,000 (quite possible) and it misses consensus estimates (155,000) by a wide margin, the market could tread water. The decent initial jobless claims numbers will not be reflected in the Unemployment Report tomorrow. The recent improvement will support the notion that this was just a seasonal adjustment like the one we had 2012.

Even the sequester is being questioned. FAA air traffic controllers returned to work and now other agencies are lining up to postpone furloughs/layoffs. From my perspective, this decision had more to do with safety than it did with delays. I don’t see this spreading to other agencies and spending cuts will be enforced.

Here is the bottom line. Central banks are printing money like mad and interest rates are at historic lows. The real rate of return (minus inflation) is negative and investors are losing money when they buy bonds. The dividend yield on the S&P 500 is greater than the yield on US 10-Year Treasuries.

Foreign investors can’t buy stocks in China and Europe is in dire straits. Growth in the US is meager, but stable. The US dollar is strong relative to other currencies and this combination makes our stock market attractive.

This morning, the ECB lowered interest rates by 25 basis points. That was widely expected and it did not spark much of a reaction. If they lower rates in the future, yields will drop into negative territory and people will have to pay banks to hold their money. This sounds absolutely crazy, but it is possible. It will create a whole new set of problems if it happens. We’ve never seen anything like this before.

I don’t like the macro backdrop, but stocks could grind higher. As long as European credit concerns remain low and China does not fall off of a cliff, this rotation into US equities will continue.

If the market can’t decline after a second consecutive Unemployment Report under 100,000, we are headed higher. Investors would be signaling that they don’t care.

Earnings season has been decent. The bar was lowered so 70% of the releases have exceeded estimates. Year-over-year comparisons paint a very sluggish picture.

The market is not rallying because companies are expanding. It is rallying because there simply aren’t any attractive investment alternatives. Companies are not investing in plant and equipment and they are not adding to payrolls. They have plenty of excess capacity. Cash flows are being used to buy back shares and that is also supporting the rally.

I don’t mind missing the next 2 to 3% of this rally, but I won’t be a chump. If the rug gets pulled out from under this market I will be on the sidelines and I won’t feel like an idiot for ignoring the warning signs.

When conditions improve and the market breaks out, I can always join the party. I will have current information and I buy with confidence.

This rally will die hard. In order to get bearish I have to see late day selling, follow through for a few days and a technical breach. We have not even had 3 consecutive down days this year.

I am day trading and I want to see how the market reacts to the Unemployment Report.

Stocks want to rally today, but I believe the excitement will be contained ahead of the big number.


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