This morning, good news is good news. The day is young and we will see how the market reacts to a decent jobs report. In May, 175,000 new jobs created and that was better than expected.
To keep things in perspective, we need 250,000 new jobs just to keep up with the labor force. On the surface this might appear to be a strong report, but it is not in close to where we need to be. It certainly won’t prompt the Fed to taper.
All of the economic releases (GDP, durable goods, ISM manufacturing, ISM services and Chicago PMI) have been mixed and combined they point to sluggish growth. I believe we are starting to see the effects of the sequester and domestic conditions will weaken the summer.
Europe’s economic activity is dismal. The overall unemployment rate for the EU is 12.2%. Analysts have been calling for a bottom for many months, but I don’t see any signs of improvement. In fact, the strongest EU member (Germany) is starting to struggle. Credit concerns remain low and EU officials are forging a centralized banking authority. This at least takes a crash out of the equation.
China’s growth has been slowing and the government does not have any stimulus plans. Many analysts believe that they won’t take action unless GDP falls to 7% (currently 7.7%). They will release industrial production, retail sales, exports, CPI/PPI and bank lending Sunday evening. Given the recent trend, I believe the news will be soft. I consider growth in China to be one of the pillars for this rally. If it starts to crumble, we could see profit taking.
Central banks around the world have been printing money like mad. We know that China has been tightening, Japan is taking a breather and the Fed plans to taper. This driver has pushed our market to a new high and it might go missing for a few months.
Money printing is not stimulating economic activity. I believe the focus in coming months will shift to growth. We need to see 200,000 new jobs each month and that needs to eventually climb to 300,000 new jobs. This will put us on a path to grow GDP by 3% or more. In this environment, the market won’t care if the Fed tightens. Unfortunately, I don’t see the global driver that will spark this type of recovery.
The selling pressure was fairly heavy this week. Stocks are snapping back this morning and we are back above resistance (SPY $164). We could easily make a new high just as we have after every prior pullback. There are not many decent investment alternatives and stocks are still attractive relative to bonds. I will watch the price action closely.
If we pullback below SPY $164, I will buy puts. I believe the news Sunday night will be concerning. If conditions in China are slipping, the growth engine of the world could be in trouble.
If I see an intraday reversal below SPY $164, I will also day trade from the short side. I don’t plan to trade from the long side. I will simply watch the market as it grinds higher and I will be looking for signs of strain.
I won’t be able to buy into this rally for at least a week or two. I need to see constructive price action over a period of time and it looks to me like there is a kink in the armor.
Money printing and strong corporate cash flows/balance sheets have gotten us this far. We won’t be able to push higher without economic growth and I don’t believe we will see it this summer.
This eight-month rally will die hard and I am not looking for a massive selloff, just a normal correction. That means I will keep my short positions fairly small. Asset Managers will buy dips and I will be exiting put positions when I see heavy selling pressure.
Use a breakdown below SPY $164 as your guide today.