Country Embraces Socialism

SUMMARY:
- Jobs report or not, stocks perform as expected, providing us opportunity to work our plan and take some more gain.
- China PMI, M&A activity set the stage for a better, partially that is, jobs report.
- My how the jobs picture has changed as our country has embraced socialism.
- US PMI remains solid though misses its expectations.
- SP500, DJ30 bumping February highs, unable to punch through even on the jobs data.
- Running out of room at the prior highs or will the Fed liquidity continue to overcome world events and buoy stocks?

MARKET SUMMARY

Stocks stick to our plan.

It did not matter whether the jobs report was there or not. Stocks performed per our plan, allowing us to catch more upside and bank some more gain. I always love it when a plan comes together. The stock market got a decent jobs report that showed over 200K jobs in the nonfarm payroll sector, and the private sector put in 230K jobs. The unemployment rate fell to 8.8%. While that is dubious, it was still good enough news for the market. It gapped higher as we were looking for it to do. It rallied through mid-morning and allowed us to bank a lot of gain on the session.

There was some selling as we expected. There was profit taking late in the day. Traders who had moved with the market on this nice run to the upside decided it was time to bank some gain. SP500 got through the March peak and ran out of steam as it approached the February peak. It sold way off of its high on the session.

Some late buying in the last hour helped push all the indices back up and keep them positive except for the semiconductor index; it closed down -1%. It is looking a bit winded, but they all closed positive and allowed us the opportunity to take that extra gain. I will talk about their patterns in a bit. Some of them are questionable, but the market did what we wanted on Friday, so I have no complaints.

MONDAY

Next week the market starts off looking at a little bit of economic data. It does not begin until Tuesday with the ISM services and the Fed minutes. We will see just how many people on the Fed are looking to lay off after QE II ends. There is not a lot of data on Wednesday X crude inventories, the mortgage index. Initial jobless claims come in on Thursday. There are some consumer credit and wholesale inventories on Friday. A very light week in terms of economic data. More importantly, earnings are about to start. It is already April 4th come Monday. That means we have to start thinking about AA and its traditional kick off to earnings season.

What will stocks do? On Friday they had a good session, so to speak. They closed well off the high. The Dow 30 and the SP500 are butting heads up against the February highs, and thus far they have been unable to punch through. The jobs data was pretty good. Everyone was giving it a big cheer, but it was unable to hold the indices at their session highs, and it was unable to take out important resistance. Maybe they have run out of gas here. Maybe they put in all the effort on the three-week rally that recovered back up to the jobs number.

What drives stocks from here? There are earnings. Stocks could give back some ahead of that, and SP500 and the Dow may be indicating that they want to do that. We might get some good buy positions if that happens. We may get pullbacks to the 50 day EMA that allow stocks to move. Remember, there are still a lot of good stocks out. They are showing good patterns that are not necessarily overextended or that can rally to the upside. We can use those as vehicles on a continuing move.

We would really like to see some kind of giveback first, particularly heading into earnings. Otherwise you have the market hanging out up at the old highs on some low-volume moves to that level. If they get some data that is not great, they may get sold back aggressively. Further, if they get some data that is good right off the bat, they can rally further but then sell aggressively given they have had no giveback after this move. We will have to see how it plays out.

The first part of this week will tell some of the story for the near term action. The sellers kind of showed their hand on Friday. They came down and pushed the market around some, but they were not able to win the session out. Indeed, buyers came right back in late on Friday. You might wonder why they were coming in, but there is money still to be put into the market.

Oh, yes. The money. That is the Fed liquidity, and it is still there. QE II is winding down, and there have been four Fed officials saying they need to reconsider whether to continue with QE II and definitely any Quantitative Easing after that. Some suggest not only ending that program but raising interest rates by 75BP in the near term.

There are the hawks out there that say we have to throttle back on all of this liquidity. How does that impact the market? Obviously, to this point, investors have not been buying into the fact that liquidity will be withdrawn. It will be, and everyone knows that; the question is when. The sixty-four billion dollar question is what effect that has on the market in the interim as the knowledge becomes more accepted that the Fed is getting ready to end Quantitative Easing. That is where it really gets interesting, and we will just have to see. Thus far the market has brushed it off. At some point it will have to deal with it because the Fed will eventually remove that liquidity.

This is a good point to start watching. We have SP500 and the Dow coming up to these prior peaks in February. They have not broken through yet, and a little pullback is good. Where do they go from there? Can the SP500 break through the A point and continue on with the pattern having beaten the odds with an ABCD? It could, no doubt about it. If the economy continues to improve, if it picks up faster, then it could overcome some of the liquidity drain when the Fed ends its Quantitative Easing programs.

Right now, I simply do not think the economy is strong enough to do that. But we still have that SP600 that has moved to a new high, and decisively so. Perhaps it is forecasting that the economy will be strong enough to offset the start of the withdrawal of liquidity by the Fed. The Fed is not going to remove it all at once. It will not pull a Greenspan from back in March of 2000 when it called back all of its money overnight. That sent the market into vapor lock and the economy afterward. It will withdraw gradually, but it also has to withdraw at a reasonable pace given the worries about inflation. Bernanke is not worried about it, but Walmart is. Who deals with more costs on a daily basis and has a better figure on the actual, real-world inflation picture? You make the call. Walmart is pretty much on the ball with respect to pricing.

In any event, things start to get a bit more interesting now. The plan worked just fine. Stocks ran up to the end of the quarter, and we were able to bank some nice gain. We still have some excellent positions that show no fear. In other words, they show no sign that they are weakening. We will see how they fare after a pullback early this week. A pullback is likely coming. How the market weathers it will tell the story about the next moves in this market X this market that has thus far defied the odds, defied the geopolitical turmoil, and even five calls by Fed officials to start withdrawing the liquidity. Someday it will have to face that music, and we will see whether it has the character to continue higher. Of course, in this instance, character equates with economic strength. I will see you on Monday to see how this puzzle plays out.

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com