Higher Interest Rates Are Putting Pressure On The Market – Watch SPY 93!

Four out of the last five Mondays have produced big gains. Last week, China's PMI posted its third consecutive month above 50, indicating economic expansion. Our market was already poised for a higher open when construction spending jumped .8% in April (analysts expected -1.3) and March's number was revised higher. The market broke out above major resistance at SPY 94 and short covering ensued. As the week wore on, the market was not able to add to those gains. Traders were cautious ahead of the Unemployment Report. In the last five months, the report has had a positive effect. This time around, the reaction was different. Analysts had projected 520,000 job losses in May and only 345,000 jobs were cut. This is the most critical piece of economic data since people without jobs can't spend money. Over two thirds of our GDP is dependent on consumption. The stage was set for a monster rally and after a big initial run-up, the market quickly reversed. Fears that the Fed would raise interest rates surfaced and short-term yields jumped. Friday's have been bullish and traders have not wanted to short heading into the weekend. The government has thrown them many curve balls and the risk of be blindsided by a new program or stimulus plan was too great. That didn’t seem to matter last Friday and the bullish pattern was broken. Furthermore, this is the weakest Monday we've seen in over a month. The fact that fewer jobs were lost last month is encouraging, however, a loss of 345,000 jobs is still very concerning. The unemployment rate rose to 9.4% and that is the "worst case scenario" used by the government during its bank stress test. In order for the unemployment rate to stop going up, we have to see 200,000 jobs created in the prior month. We are a long way from seeing that and the government does not expect the unemployment rate to drop materially for the next two years! I feel that stocks are overextended and they are due for a pullback. China can not pull the rest of the world out of an economic recession. Last Monday, Japan and South Korea reported very weak economic numbers. We know Europe and the United States are struggling. These are the major wealth centers in the world and they are all debt laden. This means that it will take a long time for us to rebound. Furthermore, China's PMI actually decreased last month and it was barely above 50. Some analysts believe that China will overproduce and they will have inventory problems. The economic news this week is fairly light. All eyes will be focused on two major bond auctions this week. If they are under subscribed, interest rates will rise and the market will break support at SPY 94. That breakdown could shift momentum to the downside as bullish latecomers bail out of the market. If the uptrend line in today's chart fails, we are likely to retest the 100-day moving average. That level also has horizontal support and I believe it will hold. I was fooled by the market last week and I want to be cautious at this level. The market will need to close below SPY 93 before I start scaling into bearish positions. If it breaks the uptrend line, I will get more aggressive. Decliners outnumber advancers by a 3 to 1 margin and I believe we will see selling into the close today. Look for stocks that have bounced with the market and hit resistance weeks ago. They have not been able to participate in the recent leg higher and they are poised to roll over. Start by selling out of the money call credit spreads and switch to put buying as the market breaks down. If the bond auctions go well and the market holds this level, I will do nothing. I need to see a pullback before I can justify getting long.

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