Jobs Number Better Than Expected. Don’t Look For A Big Rally – Too Much Uncertainty
THESE COMMENTS WERE POSTED BEFORE THE OPEN.
Yesterday, the market staged a nice rally early in the day and it was able to hold the gains. ADP, initial claims, ISM manufacturing, consumer confidence and the official PMI in China all exceeded estimates. Once the upward momentum was established, the market continued to grind higher. It currently sits below resistance at SPY $143.
Stocks in China rallied 1.7% yesterday and they continued to move higher today. Government spending and monetary easing are providing a tail wind before the leadership change next week.
Europe’s PMI was weak, but that was expected. Greece will vote on new austerity legislation and it will be presented to parliament next week. This vote will be close and if it fails, they will have to hold another election. They can’t get their next bailout payment until this austerity plan passes. I believe it will go through, but this could be a nasty little wrinkle if it does not.
The jobs report this morning came in at 171,000. That was better than expected. The upside should be relatively contained a head of the election next week.
As I outlined earlier this week, regardless of the election outcome, the market will decline after the vote. We might have a small rally if Mitt Romney is elected and the euphoria will quickly wear off. If Obama is elected, the market will immediately drift lower.
Politicians were not able to approve a budget last year so they agreed to force spending cuts and to increase taxes on January 1st. They’ve had 18 months to revisit this and they have not. After the elections, they won’t be in a negotiating mood. The next month and a half is filled with holidays and they won’t be able to strike a deal during the lame-duck session.
The fiscal cliff will weigh on the market. Many analysts believe that GDP could fall 5% next year if all the provisions are implemented. Corporations are holding off on investments until they have clarity.
Consequently, earnings guidance for Q4 has been disappointing. Next week we will hear from retailers and the results will be mixed. I don’t believe this sector will rally the market.
It looks like capital gains taxes will go up in 2013. Many investors will lock in profits so that they can pay lower taxes this year. That will create selling pressure into year end.
I believe the market will move higher today, but we won’t see a runaway rally. There is too much uncertainty and Asset Managers won’t chase.
If we rally after the election, I will wait for that momentum to stall and I will buy puts. If the market immediately drifts lower, I will buy puts if SPY $140 is breached.
I am staying on the sidelines until Tuesday. I might short a rally this morning if it stalls and we fall back below SPY $143. I will not hold overnight positions.