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Weighing The Week Ahead: More Excuses For Selling?

 April 08, 2012 11:56 PM

Experienced traders understand that markets rarely move in a straight line.

Staying with a long and strong trend -- either up or down -- is often the most difficult trade.

We expect stair steps and corrections since fundamentals rarely support such rapid changes.  The result is that as a move gets more extended, even traders who have played the trend are poised to react.

I have often cited Charles Kirk as the leading source for the trading perspective, and he also has many ideas for investors with a longer time horizon.  His chart show (small fee required) is part of my weekly preparation.  (I usually cannot cite his findings, since he posts the show on Sunday and I write on Saturday, but this week he advanced the schedule).  His explanation for last week was that the market was looking for excuses to sell --and found them.

[Related -Tackling China's Debt Problem: Can Debt-Equity Conversions Help?]

That makes sense to me, since nothing in the news was that dramatic.  The question is whether the same psychology will continue.  I'll offer some thoughts on that subject in the conclusion, but first let us do our regular review of last week's data and events.

Background on "Weighing the Week Ahead"

There are many good sources for a comprehensive weekly review. I single out what will be most important in the coming week. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.

[Related -Will Job Growth Kill The Bear-Market Signal For Stocks?]

Unlike my other articles at "A Dash" I am not trying to develop a focused, logical argument with supporting data on a single theme. I am sharing conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am trying to put the news in context.

Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!

Last Week's Data

Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
  2. It is better than expectations.

The Good

There was not much to cheer about last week.

  • Sentiment is still pretty negative.  I like to look at this through data describing behavior rather than responses to surveys.  Ed Yardeni looks at fund flows and concludes the following:

"Over the past 36 months through February, net inflows into bond mutual funds totaled $1.0 trillion, while net inflows into equity funds were close to zero. Unfortunately for bond investors, the equity funds enjoyed capital gains of $2.7 trillion over this period, while the bond funds had gains of only $437 billion. Now that bond yields are starting to move higher, those gains are likely to decline. That might convince individual investors to move back into equities."

  • ISM manufacturing was better than expected at 53.4 versus expectations of 53.0 and a 1 point increase over last month's 52.4. The ISM's own research says that this value (if annualized) corresponds to GDP growth of 3.7%.  The report internals were generally good with prices paid a bit lower, customer inventories lower, and order backlog higher. New orders were down slightly, however, and inventories unchanged rather than lower. All-in-all, a very good report.
  • Initial jobless claims declined, but from an upwardly-adjusted number.  I am calling this "good" but it is continuing a relatively flat range at the 350K level.  Job losses are only half of the problem.  We also need job creation.  As you can see from Doug Short's chart, a reduction of another 50K or so would signal much better economic health.


    The Bad

    Most of the economic news was negative.  I want to emphasize the employment situation, but I'll start with some lesser indicators.

    • ISM services disappointed.  While services make up more of the economy than manufacturing, the data series is shorter.  It is very interesting, but more difficult to interpret.
    • Auto sales were a bit below forecast and gas prices are higher.
    • Employment gains were disappointing.  Job gains from the establishment survey were only 120K, much lower than expectations of over 200K.  This deserves more careful analysis, so I will give it a special section this week.

    Interpreting the Employment Data

    The monthly employment situation report was a disappointment, for all of the reasons that last month's report was encouraging:  light on payroll job gains, negative labor force revisions, bad hourly wages, and a shorter work week.  That just about covers it.

    Others came out with a "flash report" but investors do not need that, especially since there was no trading on Friday.


    This chart from Calculated Risk shows the depths of the job losses and how far we are from the needed recovery.


    Along the same lines, the Atlanta Fed has a helpful tool.  You can plug in a target unemployment rate and a time frame to see what the monthly job gain needs to be to meet your target.  Try it!


    For several years I have championed the idea that the BLS measurement of job growth was one of several, and not always the best.  I write this in my monthly employment preview (as I did last week).  For a long period of time I opined that the official reports were too positive, so I have earned some credibility on this subject.

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