This “show me” market did not get the news it wanted this week. Stocks pulled back sharply on Wednesday and they plunged again today on a week jobs report.
Analysts were expecting 190,000 new jobs in March and half as many (88,000) were created. ADP came in below expectations on Wednesday and initial jobless claims jumped 40,000 on Thursday. The last couple of years we have seen a soft patch in April. The pop in initial claims is not to concerning since it tends to rise after a holiday. However, the other labor reports are concerning if job growth starts to reverse.
ISM services and ISM manufacturing also came in light this week. Both numbers are still above 50 and that represents gradual economic expansion.
In order for the market to make a new all-time high, it needed stable economic reports. Decent earnings announcements would have fueled the breakout.
Alcoa will release its earnings April 8th and that news could weigh on the market. Basic materials stocks have been selling off and I expect them to provide cautious guidance that is back-loaded for 2013. The market will test support at SPY 153. That is a significant level and it will hold.
Bank stocks will start reporting next Friday (JPM and WFC). Profits will be strong and financials will spark buying.
This decline will flush out bullish speculators and it will set up a nice buying opportunity. Asset Managers still want to buy stocks. Even if revenues are flat, profit margins are healthy. Cash flows will hit record levels and balance sheets have never been stronger. Interest rates are near historic lows and stocks are attractively valued at a forward P/E of 14. As long as global credit risks remain subdued and growth in China is stable, money will flow into equities. There simply aren’t any better investment alternatives.
My forecast has changed slightly. I no longer believe that we will have a breakout and follow-through. The economic backdrop is not strong enough and Asset Managers will wait for evidence. The impact of the sequester will not be felt for a month or two.
The market will test support next week and it will hold. The S&P 500 will rebound and we will challenge the highs. Unfortunately, there won’t be much of a breakout. May will be approaching and resistance will build.
I reduced my risk exposure yesterday (40%) and I am selling into this bounce (S&P down 13 points). My position at the end of the day will be 25% of target. I feel I will have an opportunity to buy at a better price level next week. I will watch the price action and see if support holds. I also want to gauge bank profits.
Lighten up on long positions and wait for support. I will not get bearish unless we break technical support at SPY 153 and I see evidence that the macro conditions are changing (rising PIIGS yields or dismal flash PMI in China).
Provided that everything remains intact, this decline will be a buying opportunity.