SUMMARY:
- No new money on the new month as investors await the jobs report and the holiday weekend.
- Stocks try an early move, but buyers put the wallet up as stocks take another day off after a good run.
- US Economic data this week looks a bit better.
- European, Asian manufacturing continue in the doldrums
- Prospects for a ‘whew’ response to the jobs report improves given the market action and the poor expectations, but will even that amount to much more upside?

MARKET SUMMARY

SP500 tries the November high again and fades for the second session.

Stocks had a little bit of trouble holding the course on Thursday. They were able to move higher initially but, just as on Wednesday, they were unable to close out the deal. On Wednesday they managed to post a gain, but there was some backsliding. Probably a bit of nervousness ahead of the jobs report. It has a lot to do with the rally up off of the second low in this second attempt at a relief rally in the overall market.

It has been a solid move to the upside, with SP500 bumping against the November highs. NASDAQ actually bumped against its March and June lows. They have reached an important milestone in the recovery move, and it is only natural that they slide back some. Volume was lower, so it was not any major rollover. It was just something of a pause. There was a bit of a sag in the move, but it is a critical sag because of the big breakdown in this recovery attempt. There are so many factors coming to a head right now. It will be quite an important session on Friday, though we may not see the resolution until the following week when we get back from the Labor Day holiday.

You have a strong selloff. There is a decent recovery to a resistance point that we have been looking at since the market sold off and tried to bottom back in early August. Now it is there. The dogs caught the car, so to speak. As you would expect, it is pulling back after doing so, and ahead of an important economic report. The question is whether the buyers will come back and push the market higher back toward the top of the range or if this is it. Is this the zenith of this recovery move? There are a lot of ABCD downside patterns. There are a lot of negatives you could point to, but the economic data has slightly improved this week. We will have to see how it plays out. Definitely a market set up for bad expectations, and we could get some kind of relief rally. But, as we have seen, that does not really help the market much this week. I will talk more about that later.

Looking at the intraday action, stocks were waffling early. There were some concerns outs of Europe and China with respect to manufacturing. German manufacturing came in at 50.9. That was not great, but it was still showing up in the positive range. Overall manufacturing in the Euro zone contracted, falling to 49 versus 50.4 in July. That is a two-year low.

Chinese manufacturing hit a new 29-month low. It is still okay, but it is just not as robust. South Korea and Taiwan contracted on the month. It was not a great news morning to begin with. Then you add the U.S. jobless claims on top of that, coming in at 409K versus 407K expected. The prior week was again revised higher to 421K from 417K. Not great numbers greeting investors in the morning, and futures were stumbling around. But stocks managed to make a run to the upside early on. That was aided by a better-than-expected Chicago PMI number. It came in at 50.6 when it was expected to contract to 48.5. Remember, 50.0 is the threshold. Above it is expansion and below it is contraction. The ISM national number expanded at a less-rapid rate than it did in July, but it did not tip negative. Everyone took that as a big shot in the arm. It was not bad news. On Wednesday, the Chicago PMI came in at 56.5 when 53 was expected. It was lower, but it was not the downbeat number that was anticipated.

Even with that boost from the National ISM (just like the boost from the Chicago number on Wednesday), stocks were unable to do anything with it. They peeled back from their gains all session long and closed negative across the board. It closed down at session lows.

SP500, -1.2%; NASDAQ, -1.3%; Dow, -1%; SP600, -2.2%; SOX, -1.7%.

A pretty thorough beating. Not huge like we have seen, but still a very solid thumping ahead of the jobs report. Then again, we have to see that stocks have rallied nicely. They have met resistance, so a bit of a pullback is to be expected, particularly in front of an important number such as the August jobs report.

Again, this could go either way. We have a normal pullback after a nice rally to resistance. We also have a pretty good rollover at a key point with negative patterns set up and not a great economic environment. The market has held up pretty well when you think about it. It has rallied up nicely off its August lows, up through June into April of this year, and then it has corrected. This is the first significant correction. It is the deepest correction the market has faced since coming off the bottom in 2009. If this is not a serious correction that will take the market down below the Summer 2010 lows, then we have to see something from stocks here. They will have to start pricing in the possibility that there is some kind of hope for economy to recover.

We have President Obama’s speech next week which will offer more Keynesian nonsense that will not provide any real stimulus. So it ultimately comes back to whether the Fed will provide more liquidity once again and send the market higher. To me it seems clear that the market is destined to fail without some kind of liquidity return. It fell as soon as the liquidity was removed back in June, and it has recovered in what would be a normal recovery after a sharp correction. If it does not get something to give it a reason to rally again, I think if it acts as a technical market should, it should sell off further. Thus we were entering some downside plays on Thursday even ahead of the jobs report. There were plays making the turn to the downside, and we picked up some positions here and there. If we get the downside push, we will have some very good entries.

FRIDAY

The big news is the payroll report, with 70K expected. Some have even been talking about a negative print given some historical factors with respect to how other jobs reports and economic data in history has led to negative precedents on jobs. They are pointing that direction. We will see. If it comes in at 70K or better, there will be a sigh-of-relief rally that could bounce stocks higher.

As we saw on Wednesday and Thursday, however, the sigh of relief did not last that long. You can see the big move on the ISM on Thursday, but it reversed and sold off. Maybe they are all just waiting for the jobs report. If they get what they want from that, they will not just sell back. That is a possibility; the indices are in a position where they could move. There has been a bit of a pullback after the rally up to the next resistance level. That is what we anticipate, and that puts the indices in a good position to continue the move higher. But they need some reason to do so.

There is the old problem we had with a very sharp selloff when QE2 was removed. The whole QE2 rally was given back. What will take its place and cause stocks to move higher now? The economic data is terrible, and it has been getting worse since January. This week was a little better. Chicago was not as atrocious as thought, and the National ISM hung on above 50. But those are hardly good numbers. Confidence is back in the 40′s. Those are lows not seen since early 2009. Things are not going well.

The President is not going to be able to provide anything. He is a firm Keynesian, demand-driven kind of guy. I am being generous when I say that I have other thoughts about him that are not even dealing with the free enterprise system whatsoever. I do not think he will come up with anything. He will probably throw in one plan that Art Laffer suggested likely the most benign of the group. He will point to that and think it proves how Reaganesque he is because he includes a program that one of his economic advisors said we should use. It will likely be one of about eight that Mr. Laffer said should be implemented. And, of course, it would be totally offset my any of the Keynesian stimulus that Mr. Obama will have.

I have said it before: It does not make a difference to pay someone $1-5K to hire a person that they will have to pay $30-40K a year. Even if it was $20K or $10K, it will not make the difference. You still have to take that money out of your own pocket to pay the salary. If you do not need the person and your business does not justify it, you will not hire someone because you get $1K credit or you get a break on their payroll taxes. There needs to be a combination of things put into play that would make that more interesting. You need all kinds of other investment tax credits and incentives to get people to invest in this country. You have to do that because of all the negative regulations against businesses and individuals that have been promulgated over the past few years.

There is so much uncertainty and so much added cost. Our healthcare is going through the roof. Remember, this is supposed to bring our prices down, but our prices are going up and our choices are going down. Ask any self-employed person who pays their own healthcare. I have the same problem. It is going through the roof. We can keep it as long as we want to pay 30-50% more. We are lucky because we are getting grandfathered in. A lot of people are not so lucky; they are getting their policies canceled because the company cannot make money on the 85/15% split that is now been mandated. But I digress.

Tomorrow we will be looking at upside and downside because the market could give us a further bounce. I do not see any reason to do that, but I am not the market. I am not going to make the decisions for millions of investors. I will just be ready to take it the way things go. We entered into some downside plays today because it looked ready. They may get thrown back in our face, but they were making the moves we wanted to see. Everything you look at would suggest that the market would go back down.

I firmly believe the market will not stay here. It will either go up and make the breakout or it will head down. It has to do one or the other because it is at a key crossroads right now, whether you are talking about the SP500, the NASDAQ, or any of the other indices. They have rallied up to that key 50% retracement level. It is also marked by other price levels, whether highs or lows. Now they have to make the decision. Will the jobs report be good enough and provide enough impetus to buy on an improving economy? Or will it be bad enough to buy because the Fed will have to act given that the President will not be able to offer anything that Congress will pass?

Perhaps that is ultimately what the upside is betting on: More liquidity from the Fed. It has to be betting on that. If there will be a break higher, it will be because maybe even some bad numbers result in an upside move because investors are looking for the Fed to step in, turn the liquidity pump back on, and bump up those asset prices for stocks, commodities, etc. Pretty much any type of financial paper out there will increase in value because the Fed will be inflating it through the additional liquidity. As I said, maybe that is what the investors are hanging their hats on. Otherwise, it looks like the market goes down based upon the patterns and the action in the economic data.

Not a pleasant prognosis. It makes it interesting, to say the least, to have not only technical and economic action involved, but government intervention (or interference) as well any time something bad or good will happen.