Jobs Report Takes Out Support At SPY $138. Light News and Choppy Trading Ahead

May 4, 2012

The market continues to chop back and forth. The economic news this week started off strong and finished on a whimper.

Early in the week ISM manufacturing and construction spending came in better than expected. The market rallied on the news and short covering pushed the S&P 500 was within striking distance of the March highs.

China’s non-manufacturing PMI was a little light and ADP employment missed estimates Wednesday. Yesterday, Europe’s PMI came in lighter than expected and that was offset by a decline in initial jobless claims.

As I’ve been saying this week, bad news from Europe should be offset by good news from China. I expected domestic economic releases to be neutral and they have been weak.

ISM services declined yesterday and that pressured stocks. This morning, the Unemployment Report showed that 115,000 new jobs were created in April. The market was looking for 175,000 new jobs. March’s number was raised by 34,000.

The market did not like the news and the SPY is testing critical support at $138. To add insult to injury, 169,000 workers were stripped out from the number because they have “given up”. If you take this into consideration, we actually lost jobs in April.

Yesterday’s improvement in initial claims is not reflected in this number. Traders could give the jobs report a “free pass”. Warm weather inflated employment two months ago and now that distortion is being “worked off”. Furthermore, the “Bernanke put” will keep a bid to the market as QE3 hopes are renewed.

Rumor has it that Spain is lobbying for assistance from the EFSF. It wants to create a “bad bank” for toxic assets. In theory, this will prevent contagion. Spain’s stocks were up 1% overnight on the news.

I can’t stress this enough. European credit concerns are the key and they are impossible to predict. I still believe that the IMF’s new funding will contain fear for a month. If this plays out, earnings and economic activity will drive the market.

Central banks are easing like mad and that is good for equities. Profits are up 10% on average and that is encouraging. The guidance has also been decent.

Elections in France will take place this weekend and socialist Hollande is expected to win. The market has priced this in and it won’t have short-term implications. On a longer-term basis, this makes entitlement reform in France unlikely.

Earnings season is starting to wind down and the economic releases next week are light. I believe the market will chop back and forth around SPY $138. This is a tough trading environment and I will maintain my current strategy.

If support holds at SPY $138, I will sell out of the money put spreads. If it does not, I will wait for support to be established (SPY $136 should hold) and then I will sell out of the money put credit spreads. I am able to find attractive stock valuations and that is why I am favoring this strategy. Interest rates are incredibly low and that makes equities attractive.

With two weeks left, my May put credit spreads are in decent shape.

I will also continue to day trade stocks that are rising to the top of the Live Update table. On a daily basis, once the market direction is established, stocks continue to move in that direction. I want to keep my overnight risk exposure to a minimum. This is a very choppy trading environment and moves one day are reversed the next.

The market has been drifting lower today and SPY $138 has been broken. We are likely to see more downside today and day traders can short this move. I am not looking for a massive selloff. The reaction to the jobs report run its course in a day or two and the bid will return.

Look for choppy directionless trading over the next few weeks. European interest rates should be stable.

If they rise, the market will take out support. If that happens, I will buy back my put spreads and take a more bearish stance.
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