The Moment of Truth.... All About Jobs
( a commentary...)
Friday morning at 8:30 AM is the moment of truth for the
markets. At least that is what the talking heads were telling
traders all day. It is important but like all things economic
the outcome may have already been baked into the cake.
Economics for Thursday put a little more fear into those who
were worried about the Nonfarm Payroll report when the Jobless
Claims jumped +17,000 to 356,000. This was the first time in
four weeks that the number was over 350K. Last weeks claims
were revised down -3,000 and analysts theorize weather was
the depressing factor. Those snowbound in the prior week
finally got out to make claims last week. Ironically the
unadjusted claims decreased in 51 states and territories
but the total number of weekly claims rose.
There are numerous conflicting employment components for the
various monthly reports. Some show minor job growth, some
show minor job declines. NONE show any significant improvement
in job creation. Is this like the emperor's clothes? Nobody
can see any jobs but everyone assures us they are there?
One analysis suggested that during the two survey weeks for
the nonfarm payrolls continuing Jobless Claims fell by 116,000.
The payroll survey is done around the 12th of the month. They
were suggesting that this would translate into an increase in
jobs of +125,000 tomorrow. Dow Jones is expecting +160,000,
the street is looking for +175,000 and one analyst on CNBC
was expecting +225,000. With estimates all over the map but
up significantly from just a couple days ago we are poised
again for a potential disappointment.
Last month the estimates were also in the same ranges and
the number was barely positive at +1,000. Various Fed heads
almost promised that those missing jobs would be found in
tomorrow's number. This has setup the markets for another
failure in confidence. At this point I am not really
concerned due to the market action this week. I think
cautious traders have already positioned themselves for
the worst and are now hoping it is just not as bad as they
expect. I think they would be relieved to just have a
positive number again. Don't forget the Challenger Layoff
report from Monday showed a +26% jump in announced layoffs
for the month over the December levels.
With the Fed on hold due to the light GDP a blowout number
could actually turn up the heat again. Any light number
will just be seen as more slow growth and not a real problem.
Should the number come in negative I would not only be very
surprised but I would expect the market to react negatively.
The Productivity report for the 4Q rose by +2.7% according
to Thursday's release. Maybe I should say dropped to only
+2.7% growth since this was the slowest growth since 2002.
The 1Q increased +3.1%, 2Q +6.1% and the 3Q soared +9.5%.
The drop back to a realistic number simply showed that the
rapid unsustainable pace of growth was just returning to
normal. Hours worked rose while unit labor costs fell and
this suggests manufacturing will not let price prevent any
new hiring.
After several days of weakness the major averages managed
to close in the green but it was not a stunning performance.
The Dow closed under 10500 once again and the Nasdaq closed
exactly on its 50 dma at 2019. Traders felt the Wednesday
drop was significantly overdone but they were not confident
enough to buy stocks before the Jobs report. WMT, HON, KO,
IP and BA were the biggest gainers on the Dow and helped
overcome losses by IBM. MSFT and INTC were down fractionally
and MSFT suffered one additional embarrassment. PFE passed
MSFT in terms of market cap pushing MSFT to 3rd place behind
GE and PFE.
The CSCO depression continued in the big cap techs with
CSCO falling to mid-December lows. INTC closed under its
100 dma and under $30. It was the lowest close since
Oct-9th. Dell closed at 32.11 and the lowest close since
August. Dell is well under its 200 dma at 33.34. With all
the majors so severely under water it is amazing the Nasdaq
is holding at the 50 dma. We have had two significantly
down days on the 28th and again on the 4th. Other than
those we have been trading sideways in a consolidation
pattern. Treading water for all practical purposes. We
still have strong emotional support at 2000 and we are
at the uptrend average support that has held since March.
The techs have pulled back to their strong support level
on decent profit taking to await the jobs report. No big
surprise there. Earnings have been good and there is
nothing to prevent us from moving higher. Each bounce is
sold but each dip is bought and this is the area where
consolidation was expected. Just look at the Nasdaq
chart above if you have any doubts about support.
The SOX has pulled back to its 100 dma at 495 and has
held there for two days despite some continued slippage
by several chip stocks. This is the key for the Nasdaq.
The SOX has not touched the 100 dma since April 2003.
This is a major sell off in semiconductors and this is
the critical support level. We could see one more dip
to horizontal support at 480 but that would be a major
break that should get bought.
The Russell-2000 also pulled back to its 50 dma at 564
and rebounded slightly. The Russell has tested the 50
dma six times since March and rebounded each time. This
level needs to hold. If we suddenly get a break of the
50dma on the Russell and the 100dma on the SOX then it
could be serious.
The Dow is consolidating nicely above the 10450 level
and has been in the same range for six days. It is still
above 10400 support and the 50 dma near 10300. We could
easily move up from here or move down slightly with no
real damage. The 50-day average has not been tested since
Thanksgiving and any real dip could easily retest that
10300 level. The blue chips are holding up the techs and
the small caps. This is exactly the reverse from the last
two months where the small cap techs lead the charge.
We appear to be seeing a rotation from prior high risk
leaders and into the defensive blue chips like drugs.
Cyclicals like AA, IP, CAT, MMM and DE are being sold
on worries that the recovery is slowing. Drugs like MRK,
LLY, SGP and PFE are seeing a flood of money as defensive
value stocks. They suffered during the recent rally in
favor of the techs. Traders are simply rotating funds
back into the defensive issues. SGP is at a six month
high and PFE hit a new twenty-one month high today.
The good news is that this is normal for a new year but
just a couple weeks later than usual. The last week of
selling has been on significantly lower volume and it
appears to be just a normal consolidation period. The
next hurdle is the Jobs report on Friday. Regardless
of the outcome there will be volatility. Those still
wising to sell will probably use any good news to dump
stocks. The odds of a sell the news event on are very
good despite the results. Personally I think the odds
of new job growth over 100,000 are very slim but what
I think does not matter. The market will react to the
number and how it impacts the recovery scenario and
the chances of a Fed rate hike. Friday is immaterial to
the larger scheme of things. Monday is the key day for
me. How the market responds on Monday to any Friday
event will tell us if the rally has any legs left.
If traders were focused entirely on earnings there would
be no doubt of direction. Over 70% of the S&P have now
announced and 67% have beaten estimates. 19% announced
inline and only 14% have disappointed. This is very good!
Overall earnings are now expected to be in the +27% range
or better for the 4Q. This is the second highest in recent
history with only 3Q-1993 higher at +30% growth. That
quarter's results sent the Dow on a vertical ramp in the
4Q to nearly 4000 in January-1994. Once the 4Q earnings
fell short of the miraculous 3Q results the Dow crashed
-12% beginning in the last week of January to nearly 3500
by the end of March. It traded sideways for the entire
year and did not reach 4000 again until February-1995.
If we could use this historical trend as a model it would
suggest that the 1Q should ramp to the heavens as traders
buy the chance for an even stronger 1Q-2004. Since the
comparisons are harder for Q1 than Q4 the odds of a repeat
are tougher. The majority of guidance for Q1 has been
coming in higher and I suspect that has kept the market
from falling under its own weight more than anything else.
In about two weeks we will start to get the mid-quarter
updates and the beginning of any earnings run for April.
That makes the next two weeks very critical. If we can
get past the Jobs report the economic calendar next week
is fairly light. There is a flurry of reports but none
are really important milestones.
IHO..The bottom line is don't let any negative Jobs commentary
on Friday or any negative market reaction bother you. Wait
for Monday and let's see how the market responds. If we
drop on Monday then be worried. There is a lot of money
on the sidelines looking for an entry point and Friday's
market action could lure them into the game. The odds are
good the Jobs outcome has already been baked into the cake
and Monday is the real moment of truth.
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