Recession Fears Surfacing
The market is noticing the weak economic data points that have been released. I expect to see profit taking into the long weekend. ISM services was weaker than expected.
PRE-OPEN MARKET COMMENTS WEDNESDAY – This is a holiday-shortened week and we
will get a decent round of economic releases. The light volume drift higher has
been able to rally above all the major moving averages, but we saw the first
signs of profit taking yesterday.
ISM manufacturing came in light Monday (46.3 vs 47.4 expected). It is
squarely in contraction territory. JOLTS job openings fell more than expected
and this morning ADP came in soft (145K vs 215K expected). ISM services will be
posted 30 minutes after the open and this will be an important number. The
services sector has been strong relative to manufacturing and services account
for 80% of our economic activity. ISM services had been slipping, but it
bounced last month. The jobs report will be released Friday during an exchange
holiday. Job growth has been strong and analysts are expecting 245K new jobs in
March. The hourly wage component will be important and anything less than .3%
will help to ease inflation. Initial jobless claims have been low for the last
4 weeks so the jobs report should hit the 200K level.
The official EU PMIs have been released and they hit a 4 month low. China’s
Caixin manufacturing PMI was flat and that could be a sign that the reopening
backlog from the Covid-19 shutdown has already run its course. Japan’s Tankan
survey was flat. In aggregate, this is not a robust backdrop.
Next week the CPI will be released and that will be an important number.
Why does all of this matter? Most analysts have been pricing in a “soft
landing”. The market has staged a light volume rally and we could see profit
taking if the economic numbers start to falter. Yesterday industrial stocks
were nailed on recession fears. I expect to see follow through in that sector.
The sentiment will shift from bullish (“the Fed will stop tightening soon”) to
bearish (“the Fed has gone too far”).
In two weeks, earnings season will kick off and we will hear from banks.
That could shed light on recent credit issues. In his annual letter, JPMorgan
Chase CEO said, “The current crisis is not yet over, and even when it is behind
us, there will be repercussions from it for years to come.” But importantly,
recent events are nothing like what occurred during the 2008 global financial
crisis,” he added in the letter released this morning.
This light volume rally has not changed my neutral to slightly bearish bias.
I still believe that swing trades need to be very short term in duration
spanning only a few days. The bounce looks great, but previous light volume
moves like this have reversed in the last year. Heading into the long weekend I
expect to see more profit taking.
Day traders should not take any positions until the ISM services number is
released 30 minutes after the open. We will test the low from Tuesday right
away. Given the recent light volume rally which is vulnerable to profit taking
and given the selling pressure we saw yesterday, I am more interested in
trading from the short side today. Let the early action play out. If the first
directional move is wimpy, I like waiting for it to stall. That usually sets up
an hour after the open and I like fading it. Overseas markets were fairly flat.
Support is at the low from Tuesday and resistance is at the high from
Tuesday.