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Huge Jobs Report - SPY Will Test the 100-day MA Today

Posted by Pete Stolcers on February 1

Posted 9:30 AM ET – This has been an extremely busy news week. In general, the news has been good and the S&P 500 is within striking distance of the 100-day moving average. I am looking for signs of exhaustion and I believe the next big move is down.

The FOMC was dovish, but we don’t know to what degree. Powell said that the balance sheet would remain larger than expected, but we can’t quantify the statement. The market is pricing in no rate hikes in 2019 and the Fed still forecasts to increases. Any surprise would be bearish for the market.

Trade negotiations with China must have gone well. The comments were positive and everyone expected that. Talks will resume in two weeks and I view that as very encouraging. It tells me that progress is being made.

Earnings have been good, but guidance has been cautious. At a forward P/E of 16, stocks are trading near the upper end of the range. Apple and Facebook surged higher while Amazon and Microsoft retreated. Now that most of the mega cap tech stocks have reported, sellers will be a little more aggressive. There are still two weeks of heavy earnings announcements ahead.

Brexit has reached a critical point. The deadline will not be extended and if England can’t renegotiate the Irish order issues with the EU they will exit without a deal. This would be disruptive for the market.

Global economic conditions continue to slip. Manufacturing in China is contracting (manufacturing PMI 49.5) and international companies doing business in China have lowered guidance. Retail sales in Germany fell 4.3% in December (Y/Y) and Italy is officially in a recession (GDP -.2%).

Domestic economic growth is solid and the Fed is optimistic that it will continue. ADP said that 213,000 new jobs are created in the private sector during the month of January. The jobs report this morning showed that 304,000 new jobs were added. Hourly wages only increased .1% and that is market friendly (low inflation). Employment in the US is at record levels. ISM manufacturing will be released 30 minutes after the open.

Swing traders should remain in cash. I know it’s hard to watch the market grind higher but I feel this bounce is on borrowed time. After heavy selling in December it was difficult to determine how major market moving events would play out and the risk was elevated. The market could have rolled over at the 50-day moving average or before that. The trade talks with China are far from over, Brexit could end badly, we could have another government shutdown and the Fed could get more hawkish now that the market has recovered. Earnings were good but the reactions at this level have been pretty muted. I believe that global economic conditions will continue to slow and that the market will roll over. I’m watching for signs of exhaustion and I’m ready to short.

I have not been carrying overnight positions, but that doesn’t mean I haven’t caught this rally. We’ve seen a series of lower opens and higher closes so day trading has outperformed buy and hold without the overnight risk. Resistance at the 100-day MA will be challenged today. If the market struggles to move through it we will know that the headwinds are blowing. I will buy this morning, but I will wait for the bid to be tested (small dip and instant bounce). I don’t think we will get through $271.10 on the first try, but I could be wrong. This was a very strong jobs report. Look for resistance at that level and choppy trading this afternoon.

The news this week has generally been good, but not overwhelmingly so. There are still plenty of dark clouds that can cause a lightning strike and there are many unresolved issues. I believe that risk is being discounted and any surprise favors the downside.
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