Stocks Trying to Keep Bounce Going

The stock market ended last week with a very nice bounce from the lows seen on Thursday and I discussed in the last update. Market internals were fine, but certainly not great, so far. At this point, the most prominent stock market indices saw yet another pullback that couldn’t gather steam once it approached 5%. While very unusual historically, this has been business as usual since mid 2012.

The most important things to watch now are how stocks behave as this bounce continues, which it should at least a little while longer as well as if the bounce takes the Dow and S&P 500 back to the old highs. At this point, for a change, I do not have a firm opinion on how the next few weeks shake out. I want to take a wait and see approach. We have more than enough longs if stocks continue to rise, but I will not hesitate to trim positions if the rally looks crummy.

As you know, long dated treasuries have been our single largest position all year in our global macro strategy and that remains the case. As stocks began to bounce on Thursday and took off on Friday on the solid jobs report, bonds did not sell off. They continue to confound the masses on good economic news and now it’s time for bonds to make new highs for 2014.

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Here We Go Again… Jobs Friday

Wasn’t it just yesterday that we were talking about the monthly employment report? Well, we’re here again! With back to back weak reports blamed on “weather”, stocks are set up to rally on a good report that gets past weather and a bad but not atrocious report that blames “weather”. It must be nice to have the “weather” fall back on. I may have to try that with clients. Credit a good quarterly report on our skills, but blame a bad report on the market.

14 of the last 15 jobs Fridays have seen stocks rally so that has to be the model for today. A big up opening should be a very short-term selling opportunity, but any dip remains buyable.

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The “All Important” Employment Report

Today is Jobs Friday and the pundits are usually out in force predicting the number of non-farm payroll jobs created. That’s one area I usually steer clear of as it is probably the most volatile, inconsistent and unpredictable economic number of the month. What’s even more futile is forecasting the market’s reaction, which is sometimes a head scratcher.

Last month’s number was a complete and utter disaster, but the stock market barely shrugged and tested the highs the following week. I keep hearing people blaming one area that is totally defenseless, Mother Nature. It seems like whenever the pundits are stumped, they blame the weather. Given the trend, last month’s number is supposed to be an outlier that potentially gets revised upward today with at least a decent number. As I said, this is all just guessing. We will see shortly. Regardless of the number, I do not believe for a second that it will alter the Fed’s tapering course, although as you know, I vehemently disagree with any taper!

In yesterday’s pre-market piece, http://investfortomorrowblog.com/archives/1002, I spoke about a very short-term rally beginning and the market did not disappoint. I do not believe THE bottom is in, but the bulls can certainly push a little higher if they want to today. This remains a “sell the rally” market until we do a better job of rebuilding the wall of worry. Sentiment numbers are well on the way and should be there with another push to new 2014 lows.

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Bears Take a Breather

Here is the link to the segment I did on Fox Business the other day with Lori Rothman and Adam Shapiro. This pretty much spells out what I have written here regarding my thoughts on the market this quarter. Thanks to Adam and Lori for letting me articulate my forecast.

http://video.foxbusiness.com/v/3151668123001/ingredients-for-ending-a-bull-market/#sp=show-clips

Stock market action over the past two days gives a glimmer of hope to the bulls for a short-term rally. I do not believe the final bottom is in as I have mentioned before, but this is one of those times where the bears look a little tired and should let the bulls make a little noise. Some of the sentiment indicators are showing some excessive very short-term pessimism that could support a move, but given that I remain negative for more than a trading rally, holding above this week’s lows are key to that scenario. If the major indices close below those levels, the bears should quickly attack and it could be ugly.

In a perfect world, which, seriously, when do I ever get; stocks would rally for a few days to a week and then rollover again to new lows. Those lows would see some panic, much more negative sentiment, but not as negative technical indicators than earlier this week. Then we would have the ingredients in place for a better rally. That all sounds really nice, but Mr. Market rarely gives us exactly what we want.

For now, if we do get a rally, I am keenly focused on the quality of the move. As I mentioned on Twitter yesterday, the biotech and transportation sectors look like they are worth a “poke” on the long side as long as they do not close below Wednesday’s low.

Everyone is focused on tomorrow’s monthly employment report after the disastrous one we had last month. My initial take is that this report will be decent and we will see upward revisions from last month. This report is so beyond volatile, inconsistent and unpredictable, let alone trying to interpret the market’s reaction beforehand.

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Employment Report Key to Very Short-Term

On Friday morning at 8:30am the monthly jobs report will be out. This has become the most watched and heavily anticipated economic report of the month. Over the past year or so it has been the bulls’ ATM machine as the vast majority of those days have been up and very easy on the bulls with few meaningful losses.

The major stock market indices are in a very interesting position heading into Friday. Since Christmas they have essentially gone nowhere, changing the short-term direction to neutral. With the most seasonally strong short-term period of the year recently ending and market sentiment remaining at very dangerous levels, a “window of opportunity” as I like to call it has opened for a 5-10% pullback. On the flipside, the upside for stocks looks to be capped at 3-5%, skewing the risk/reward ratio in the bears’ favor.

With stocks pulling back to open the year and remaining below their highs, weakness from here that breaches the recent low on January 6 on a closing basis will likely accelerate selling into the eventual 5-10% pullback discussed above. However, if the employment report is construed to be very positive for stocks, the major indices should see a quick spurt to new highs before setting up once again for the 5-10% pullback later this month and into February. Either way, Friday should be a key day.

I am in the process of wrapping up my Q4 and 2013 report to clients and will hopefully finish up my 2014 Fearless Forecast sometime next week. I have a quick trip to balmy and tropical Chicago next week that hopefully is seamless. Yes. I know. Who plans trips to Chicago in the middle of January?!?!

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Big Jobs Friday

The biggest economic report of the month is due out at 8:30am on Friday. It’s become even more closely watched if that’s possible because of the Fed’s focus on the unemployment rate for scaling back their massive bond purchases and then raising interest rates. It is widely forecasted that tomorrow’s number will be good to strong.

What becomes very interesting for me is how the market would view better economic news. Is good news still good news or will we start to morph into good news is bad news because Bernanke’s easy money policies will be ending. This is what normally happens during the maturation of a bull market. At the end, good news or strong economic data is reacted to poorly because the Fed is on the verge of raising interest rates to slow down the economy and control inflation. I don’t think we have that type of good news on the horizon anytime soon, but today’s reaction to good data will be instructive.

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