Jobs Data Disappoints Investors

SUMMARY:
- Weak, very weak, jobs data disappoints investors.
- Stocks sell, but they do good work in minimizing the damage.
- Unemployment rate rises even as jobs pool falls, underscoring the weakness in jobs market.
- More testing is likely but market shows surprising strength in the face of bad news, suggesting a test versus a selloff.

MARKET SUMMARY

Woeful jobs data hurts stocks, but investors move in on the dip.

Weak jobs data on Friday disappointed investors and knocked the market back for some significant losses. Investors were not overly disappointed, however, because they used the selling to step back in and push stocks back to the upside as you can see from the chart of the SP500. They did not finish positive on the day, but there were very good recovery moves. NASDAQ was down 1.4% on its low, but it rebounded to close with just a 0.4% decline. The NYSE sold down 1.5% on its low, but it managed to recover almost half of that, closing at just 0.8%. There was downside, but it was not overly negative.

Volume fell significantly on both the NYSE and the NASDAQ. Volume on the NASDAQ fell 14%, and it was down almost 11% on the NYSE. Lower volume and the recovery off of the session lows hit early on both indicate that sellers are not just dumping stocks. The fear on the day was that investors would come in with all the good news they could possibly have and then get a bad number on the jobs report and really sell the market. It looked like they might do that early, but they did manage to find support and rally back   not turning positive but nicely cutting the losses. That would suggest that our scenario is in place of a pullback to test versus a rollover.

I always thought this was a relief bounce, but I was open to change as it continued higher. It certainly has not made the breakout to a new rally high, but it exhibited good strength to the upside. Now it has had very bad news after eight days of upside and about all the good news any market could possibly have. It sold off on that bad news, but only modestly; that is another indication that this is a positive for the upside longer term. Once this pullback runs its course, it will be ready to move higher once again.

What news on the day made the difference? Of course it was the jobs report after the ADP report on Thursday came in much stronger than expected, more doubling expectations. The nonfarm payroll came in horribly weak at 18K jobs versus 80K expected. Some people already said 175K was expected on the nonfarm payrolls, and it did not come close. Moreover, May was revised to 25K from 54K, more than halving the prior iteration. Private payrolls were nowhere near the expectations of most pundits, coming in at 57K versus 110K.

The unemployment rate was interesting. It rose to 9.2% versus 9.1% before and a repeat of that number as expected. Often the unemployment rate will rise as the economy starts to improve. More people start looking for work, there are not enough jobs to absorb them all, and that equals a higher unemployment rate. This time the jobs pool fell by 270K. There were not more people looking for jobs and inflating the jobless claims numbers. Job creation is so anemic that the unemployment rate rose even with a 270K reduction in the work force. That is an indication of just how pernicious this downturn is and what trouble people have in finding work. Employers simply do not want to spend the money to hire new people.

Another important element of the report is the average workweek. It came in at 34.3 when 34.4 was expected, and 34.4 was hit the month before. There had been an increase, but it did not continue. Overall hours worked are still rather low, so there is not much pressure on companies to hire more employees.

Wholesale inventories for May rose 1.8%, doubling the 0.9% expected. The revisions were up to 1.1% from 0.8% in April. This may seem like a good thing. Companies are producing more goods, but it is not a good thing if they cannot sell them. Inventories are not stacking up because companies are making more goods; the regional PMI reports show that some areas are even contracting. There is not a big ramp up in manufacturing, and a lot of companies in the manufacturing business are cutting back or slowing down their runs. This tells us it is only a lack of sales pushing inventories higher. Retailers are not out buying as much from the wholesalers.

This economic data was more than enough to dampen the enthusiasm seen earlier in the week from the solid Chicago manufacturing number, the ISM manufacturing that was stronger than expected, and the ADP report out on Thursday. Stocks sold back and closed lower, although it was good to see them manage to recover off of the lows into the close.

MONDAY

There is a slew of important data next week. Export and import prices are important on the 13th. We also have FOMC minutes. It is always interesting to see how the Fed is shaping up so we can figure out what will happen at the next meeting. Continuing claims on Thursday, as always. Retail Sales for June are out, and that is an important read. There is the core PPI along with the PPI. On Friday we have the CPI and core CPI along with the New York Empire Manufacturing that fell almost 8 points in June. Very important indeed.

You have to take a lot of this in light of the economic data up to this point. It does not indicate any strong recovery. On Thursday I said there was no reason to expect the jobs number to be as strong as expected unless the administration or government was playing around with the numbers. One would assume they had not done so given the weak result. There will be scrutiny on this week’s economic data, though it will be hard to top the disappointment of the Friday jobs report for June.

That said, what I discussed earlier is still the relevant view of the near future. The indices sold on the news, but they were able to pare their losses nicely. That means I expect that the relief rally and the stripes it was showing are changing somewhat. It is not just a relief rally; it is trying to actually set up a test and make a new break to the upside. It can do that. It has, after all, changed somewhat. You have to be open to change in the market. We never thought it would bounce this high, and thus the plays we were making to the upside performed better than we thought as well. We have very good gain in hand. Now the question is just what I talked about last night and this morning: Will this be a pullback, a rollover, or a break higher from here?

It does not look like it has finished testing yet. Based on the action it has shown, I do not think there is necessarily a rollover in place. After all, we saw good recoveries on Friday. Very interesting, indeed. I am looking more for a test of this move. That does not mean a single day; I am looking for two, three, or maybe four or five days of a test before a move back up that could realistically have a chance of breaking through the prior highs. That did not mean we were not active. We did pick up shares of stocks such as ININ, DANG, and NTES. Those were very nice pullbacks that tapped support and looked to be ready to move back to the upside. We are already using this pullback to enter some positions. We are just taking partials right now, but if things improve with the test, we could take larger positions overall.

That is the mindset I have heading into this week. We could still get a rollover. There is no doubt that the market could just turn over and dive if the economic data continues on the heels of the Friday jobs report and shows that slowing overcomes the ADP as well as the other reports last week that suggested there was improvement taking place in the economic data. In other words, more bad news may trump the good feelings engendered during the week that helped drive the market to the upside.

More likely, given what we have seen in the action of the leaders, we will get a pullback. Somewhere back down near this 1330 range. If it can hold along that range on a three, four, or five day pullback, that puts it in excellent shape to make a new break to the upside and try to take out the prior high. That is pretty cool. We will let it do that, obviously, and enjoy the ride all the way up with our continuing upside plays. That would be a marked change from what we were expecting to happen on this move. Then again, you have to be able to adjust to the market and play accordingly.

As I said last night, I would never have been involved in this market if I would have merely trusted gut instincts. It was saying one thing, but then I saw certain stocks saying it was time to buy. I did not think I knew better than the market, so I just bought in and made money. We will do that again. We will be patient. We will probably see leaders pull back and hold, and we can do what we did on Friday and take some partial positions on those along the way. Then we have good exposure when the market starts to break back to the upside. We can start buying even more when it does that.

The jobs report was not total carnage (even though it was an ugly report) because the market is still showing resilience. If it can show that same resilience on Friday in the face of such bad news, it is likely just ready to test a bit and then make another run or take another shot at that April and May peak. After all, earnings are coming. What better way to celebrate a good earnings season than to have a bit of pullback just before it and then break to a new rally high.

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