- Indices sell again but also rebound off the lows again as a rather orderly test continues.
- M&A gets even more interesting as AMAT takes VSEA.
- ADP private sector jobs survey misses the mark.
- ISM Service index declines sharply but remains at expansion levels.
- Worries about economic sustainability send commodities tumbling as Chinese stock market sells for tenth consecutive session.
- Selling continues with the small caps again taking the brunt, but some good rebounds off session lows show buyers have not completely lost their appetite.

MARKET SUMMARY

Third day downside, no new dead terrorists (or even pictures), but again some good rebounds.

No Bin Laden sightings, no photos to be released, and that leaves the only game in town figuring out what the most recent take on Pakistan’s role by the Administration.  Tuesday Hillary Clinton gives Pakistan a shout out, saying we couldn’t have done it without its vigilance.  CIA head Panetta didn’t exactly see it that way, opining that Pakistan either knew OBL was there or was simply incompetent.  The Administration brought it on itself: without pictures there was nothing else to do but listen to its members contradict each other.  One thing is for sure, OBL didn’t rise (unless he is floating somewhere in the ocean) from the dead or surf to shore.  Wrong religion I know, but worth noting given all of the alleged controversy over just about every aspect of the event OTHER than the performance of the troops carrying it out. 

I can somewhat understand not releasing any photos; why give them last pictures to build the martyr case any further? But, and it is a big but, why make the big deal they are making out of the decision to send in the troops so that we would know we got him versus dropping some 2,000 pound bombs on the compound and reducing it to rubble the size of Lego’s?  As it is we might as well have bombed the place to powder and then scooped up DNA from the goo stains that were left and ID him that way?  This is just more of this Administration’s internal contradictions that just make you wonder.  A good decision on taking him out but then inconsistent logic or at least inconsistent stories. 

But I digress, though tongue in cheek.  The market didn’t have anything really to drive it, or more accurately, it didn’t find anything to its liking to rally it further.  AMAT is buying VSEA in a very interesting deal.  An unfortunate one in our opinion as VSEA is a great trading stock that now is swallowed by a boring, sea cow of a stock in terms of trading. 

ADP reported just 179K private jobs in its private jobs survey versus the 200K expected.  Many brushed off the report (though the market didn’t treat is as chopped liver), stating ADP only tracked the government’s jobs report in March.  It has, however, come closer and closer to the government report, so much so that the government has moved the private sector jobs category to the top line of the numbers it releases each month.  Hey, if overall jobs stink, use the facts that look the base.  Private payrolls have improved better of late though they are still woeful.  Woeful.  In any event, the miss by ADP suggests that the Friday private payrolls, also expected at 200K, may miss as well.  That was not lost on the market though it was over the head of many financial station journalists.  Of course we are just kidding and have nothing but love for them because Jon appears on those stations and you have to keep the relations in order, right?

The China Syndrome

China’s stock market fell for the tenth straight session.  That has many concerned.  It was enough to help commodities drop like stones after rising like helium balloons. 

Sure what goes up must come down as Newton proved with his physics experiments and Alan Greenspan proved in his stock market experiments of the late 1990′s and early 2000′s (remember his plea for data on the wealth effect after he had crashed the market, stating that the Fed wasn’t sure this actually occurs though it did base its policies on the theory and drained trillions of dollars from US citizens’ retirement accounts on a theory that had no empirical evidentiary support), but there is a nasty history with central banks and their attempts to ‘manage’ economies to engineer ‘soft landings’ and foil inflation.  Ironically they do the latter but by the means intended.

What do I mean?  I used the puppy analogy this morning in an early alert.  When central banks feel an economy is heating up too much they believe inflation must be coming.  They talk about the need to hike rates to slow growth just as the owner of a puppy talks to that animal about how it needs to use the papers to do its business and it really should not chew up the internet feed coming through the wall.  It doesn’t work for either.  Then the central banks roll up a newspaper and threaten to spank the market/puppy, perhaps even going so far as to slap the paper in a hand to make some noise.  That may get the puppy to look but it quickly goes about its business whether that is doing its business or otherwise.  The central bank gets a bit miffed and lightly taps the puppy with the paper.  That startles the puppy and it stops the behavior.  For awhile.  Gee, that really didn’t hurt, the puppy opines; this guy is all talk and if that is the best he can do with the paper then bring it on.  I am going to chew up every shoe in the house.  After several light pops with the paper the central bank has had it, its patience at waiting for the behavior change long gone.  It then rears back and knocks the puppy across the floor. The puppy, its feelings crushed, runs off and sulks in the corner.  Even after the central bank wants the puppy to come back out the puppy remains in the corner, eyeing the banker, no longer trusting that fellow anymore.

That scenario has happened almost every time the Fed or another central bank moves through a rate hiking progression.  Greenspan did it in 1999 and 2000.  I remember that Greenspan, after recalling all of the money he flooded the economy with ahead of Y2K in March of 2000, kept hiking rates through the spring, finishing the series off, whether intending that to be the last one or not, with a 50BP rate hike in May.  That was the rolled up newspaper coming down hard on the market.  It ran off and didn’t come back for a long, long time regardless of Fed rate cuts and cajoling. 

China has raised bank reserve requirements, lending requirements, interest rates, margin requirements, and those are the things we know about.  It is a communist society after all and things still happen there that have no explanation or at least none that anyone dares to investigate.  Could it have reached the point of the hard shot with the rolled up newspaper? 

Is India in the same place?  After ‘baby step’ hikes for months and months with no result, it just hiked interest rates 50BP.  It is a familiar scenario: the all-knowing central bank says it will move slowly and cautiously, and at first it does.  But in the end it is manned by humans and those humans lose their patience and there goes caution.  They overreact and then wonder why, after months and months of rate hikes, the market suddenly crashes.  If you want to see the first episode of this in modern times here in the US, read about the 1929 US central bank and what it did.  Without giving it away, or at least all of it, its final hike was 100BP.

We need to watch commodities: they were ready to test and boy are they.  If it turns into something ugly, then there is reason for concern about China and India just as many say it is time for the recovery to pick up steam. 

Services fall.

The ISM Services index for April was a disappointment at 52.8 when 57.4 was expected.  March was unrevised at 57.3.  Services continue to struggle,  at least holding above 50, the line of demarcation between expansion and contraction.

Q1 GDP was 1.8% on the first read but many are saying it will rise in subsequent iterations.  The early data from Q2 indicate the economy slowed through the end of Q1 and continued on into Q2.  That does not bode well of course.

As for jobs on Friday, the weak ISM suggests that companies in the service industry likely did not engage in much hiring in April.

Back to the market.

Wow that was a run around the bend, but it makes the point.  The market had a reason to be glum on top of the technical need to test.  The breakout from the inverted head and shoulders patterns and subsequent run is being tested.  Stocks have sold for the third session, and for the second straight day they tested lower intraday and rebounded in the last hour.  Buyers are still putting in some bids, and this is a pretty good test in that respect.  It is also pretty good in that the indices are holding where you expect them to.

The disappointment is the poor performance by the small caps (-1.05%) as they continue to lag.  Even so, they are still over the February high, coming back to test that level along with the other indices.  Perhaps not the panache of SP500 and NASDAQ, but at least holding up above key levels. 

SP500 held over its 18 day EMA and tested the February peak, rebounding to cut the losses into the close, bouncing 6 points off the low.  NASDAQ tapped at the 20 day EMA and rebounded, cutting 20 points off of its session low, recovering more ground than it ended up losing on the day.  DJ30 tapped the 10 day EMA on the low and bounced some; it is not even paying attention.  Decent 1-2-3 pullbacks thus far.  Even SOX (+0.06%) was in on the action, rebounding for a second session after undercutting the 50 day EMA on the low. Chips have better news and perhaps they can bounce; perhaps.

More data heading our way Thursday in a warm-up for the jobs report.  Jobless claims and Productivity are both important but both just the warm-up acts for Friday.

The indices are more or less in position to make the bounce back and rally again.  Indeed, they are at the February highs and other key support that should bounce them upside.  That is in conflict with the Friday jobs report to the extent you want them to bounce Thursday.  The ADP disappointment has investors thinking about that jobs report, not to mention the lousy Q1 GDP already reported.  We hear jobs are being created in the private sector, but at the same time we learn that the greatest job creation machine on earth, the US small business sector, is not taking out many loans versus the big multinationals.  That indicates business is not booming for the smaller businesses and thus jobs are anemic still.  I have said it before: this administration, despite its casual statements otherwise, is anti-small business.  Keep small business in check and you can control the US economy because big business is union dominated and this administration has already shown its umbilical to unions with the Chrysler bailout and the shredding of the rule of law when the secured bond holders were labeled crooks and forced out of their rights in order to turn the company over to union ownership.  Okay I said it (I hear Sam Kinison in the background from ‘Back to School’ screaming ‘SAY IT! SAY IT!’ when trying to cajole students into saying what was on their minds. Yes, yes, a digression as usual.

The question: will buyers want to buy ahead of the Friday jobs report or not?  We will find out.  There are obviously stocks that have sold this week.  There are stocks that have held support and set up nice little flags.  There are stocks that sold hard early Wednesday and then rebounded sharply.  If they break back to the upside that will be our answer.  We prefer the action of stocks to most news events though earnings require respect no matter what. 

So we will again, as always, look at good stocks in position to move and if they move we can pick up some positions.  Be patient, let the move come to us, and if it does great.  If not we look elsewhere as there is no point in chasing the bus.  As for existing positions, if the market is going to move, those that have held close to support will be in position to rebound as well.  If they do and bounce off of support or recapture support, then we let them run.