The bad news keeps coming and the market keeps pushing higher. This morning, ADP employment came in at 119,000 and analysts were expecting 155,000 new jobs in the private sector during April. The recent economic soft patch appears to be more than a seasonal adjustment.
In the last month, every economic release has missed expectations. In the last week, durable goods orders, the Beige Book, Chicago PMI and ADP have missed. ISM manufacturing came in at 50.7 and it was better than expected, but barely above 50.
The official PMI from China was worse than expected. Many analysts were looking for improvement from the flash reading two weeks ago. Chinese officials don’t have any stimulus plans.
Conditions in Europe are dire and Germany (the pillar of strength) is slipping. International corporations like General Electric and IBM are NOT forecasting a European recovery in the back half of 2013. The ECB is expected to lower rates by a quarter point tomorrow and I believe this is priced into the market. If they don’t lower rates, look out below.
Companies are beating earnings estimates because analysts lowered the bar. Most have beaten on the bottom line and missed on the top line. Year-over-year comparisons paint a sluggish picture.
In a world where central banks are printing money and slashing interest rates, money is looking for a safe haven. Dividend yields on the S&P 500 are greater than the yield on US 10-Year Treasuries.
Apple issued debt yesterday and the offering was over-subscribed. They plan to pay dividends out to shareholders with the proceeds. Their current internal rate of return is greater than the interest payment on their debt. This is a win/win situation for investors. It demonstrates that corporate debt in many cases is a more attractive alternative than sovereign debt.
This flight to safety is propping up our stock market. There are very few attractive investment alternatives and money is flowing into equities. Revenues might be flat, but margins have been maintained. Cash flows are at record levels and balance sheets are strong. Companies are using that cash to repurchase shares and that is also boosting the market.
This phenomenon explains why the market is rallying when macro conditions are deteriorating. With each release, the burden becomes heavier and eventually, support will give. Friday’s Unemployment Report could be the catalyst for a meaningful decline.
To this point, traders have been willing to dismiss the weak economic releases as a seasonal adjustment. We had a similar event in April 2012 and activity rebounded. I am not as optimistic and I see mounting evidence of a global slowdown.
This rally will die hard. We haven’t even had three consecutive down days this year. I’m not going to buy puts, but I am not going to buy calls either. I feel the next big move is down, but I need to see late day selling, follow-through for a few days and a breach of technical support (SPY $155). Once I have that, I will buy puts with confidence.
Asset Managers are watching the macro backdrop and they will not chase stocks near all-time high. If the market starts to roll over, they will pull bids so that they can gauge selling pressure. If they see a lot of profit taking, they will wait until the market finds support. By the same token, anyone looking to take risk off of the table is more compelled to do so after a month of dismal economic releases.
The next decline will be deeper and it will last a little longer. I would be surprised if SPY 153 is not tested in the next two weeks.
I’ve been telling you to lighten up on long positions or at least to hedge overnights. Given today’s number I would advise you to get out of longs. You can always get back in. Don’t risk having the rug pulled out from under you.
The market feels like it wants to move lower today. Any hints about the end of QE during the FOMC minutes will weigh on the market and we could see selling late in the day. I am day trading from the short side today.
The market’s resilience will be challenged Friday. Day trade from the short side, but don’t pick a market top. We need to see that sellers are getting aggressive.