Yesterday, stocks shot higher after a favorable ISM manufacturing number. Flat results were expected and improving conditions forced shorts to cover. The rally felt a little “fluffy” and the news today was more substantial.
Overnight the European PMI was released. Results were weak, but in-line. Germany’s unemployment rate is creeping higher (6.7%) and almost half of the EU is officially in a recession.
Spain is in focus and Standard & Poor’s downgraded its credit rating by two notches (one was expected) last week. S&P followed up with a broad-based downgrade of Spanish banks this week. Spain will hold a bond auction tomorrow and the results will impact trading. I believe the ECB will support the relatively small auction and the results will be “acceptable”. The IMF’s $1 trillion slush fund will also pacify credit concerns for a few weeks.
This morning ADP employment came in light at 119,000. I mentioned yesterday that this was likely. There was a huge disparity between the Unemployment Report and ADP last month and something had to give. Initial jobless claims spiked before Easter and they have not retracted. This is not a healthy sign.
Tomorrow, initial claims and ISM services will be released. Any decline in initial claims will tame fear ahead of Friday’s jobs report. More than 80% of our economic activity comes from the service sector and ISM services is an important release. I believe it will be flat to slightly lower.
China will release manufacturing numbers tonight and they should be relatively strong. If Spain’s bond auction goes well (and it should), stocks in Europe will edge higher. The ECB will also release its statement and given the recent economic downturn, it should be dovish. This should set-up a positive backdrop for domestic releases.
If initial claims decline slightly and the ISM services number is flat, the market should find support. I believe last month’s Unemployment Report will be revised upwards. However, analysts are expecting 175,000 new jobs in March and I believe that number is high. If this plays out, we will see a small relief rally.
We have a number of potential “landmines” that we have to navigate in the next two days. All told, the negative news and the positive news should balance out. The focus will return to earnings and interest rates.
More than half of the S&P 500 has reported and earnings are up 10% year-over-year. The guidance has also been decent. The one concern I have is that cyclical stocks are sluggish. That tells me that Asset Managers are not embracing global economic growth.
Interest rates will remain low and that is bullish for equities. India lowered interest rates by 50 basis points two weeks ago (first time in four years) and yesterday Australia lowered its interest rates by the same amount (25 basis points expected). China will reduce bank reserve requirements in the next few weeks and that will be bullish.
I am not looking for a runaway rally, but we might challenge the highs from March. The “sell in May and go away” bears are getting squeezed. When they finally throw in the towel, we will be ready for a swift decline. We are still a couple of weeks away from that.
The pullback this morning quickly found support. I believe the selling will be relatively contained today. If the market can tread water tomorrow, I believe it will recover after Friday’s jobs report.
I wish I could give you a better read on the market, but I can’t. There is no follow-through and the price action is very choppy. That is why I am distancing myself from the action by selling out of the money put credit spreads. I am also day trading stocks from the Live Update table. SPY 139.50 has been a nice little support level. As long as we are above it, I will tend to trade from the long side. If we fall below it I will day trade from the short side. I still want to keep my overnight exposure to a minimum.
If the market can hold up this week, consider selling a few out of the money put credit spreads that expire in May.
I probably won’t day trade today, but if I do, retail looks good from the long side.