Yes, a mkt pause is in play today after the Dow reached new highs on the year this morning. That said,  pullbacks are getting shallower, as anticipated last week. We saw a 15 point pullback on Monday, and if the e-minis pulled back 13-15  points to last week’s highs at 1150-1152 the stock market would still be all bulled up. Even if it dropped 22 points to the previous 2010 high on the June contract at 1143, the market would be all bulled up. And the trade will remember the year high on the continuation contract was 1148,  implying  1148 could backstop any return move to last weeks highs at 1152.

Even though the 3-minis have reached the Feb upper channel extreme, the stock market will remain aggressively bullish barring any unforeseen exogenous shocks.

Event-Driven Research for Risk Managers
John Bougearel
Author of Riding the Storm Out
Registered Commodity Trading Advisor
Director of Financial and Equity Research
Structural Logic, Inc.

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Granted, I haven't studied the roots of this survey vs. last week's reports. But, given retail sales reports last week from the retailers, doesn't this seem like a sandbag number this week? What's economy.com saying about this?  Based on a simpletons point of view (mine), I think there is upside risk to this number this Friday, thus bullish input. What say you?

Not really, economists have to account for a shorter month and the blizzards. I have written retail sales down as a negative input for the stock market this week and jobless claims as a positive input. Whether I am right or wrong I don’t really care.  What I do care about is whether or not the market is validating (confirming) or contradicting my price correlation models. The price models I am overweighting suggest a market correction is more likely than trend continuation this week.  The model I am underweighting suggests trend continuation this week into Friday’s Retail Sales report.

If you review my stock mkt “trend following the Feb 5 and March 5 NFP reports” you will find that one upside model targets 1157 by Friday’s March 12 retail sales. If the market doesn’t rotate lower or digest last wks gains ahead of Thursday’s jobless claims, the idea is the mkt could reach 1157 by Friday’s retail sales report. That would possibly set up a short term sell signal about 10 points above the year highs at 1148.  

However, I am leaning towards or favoring scripts that suggest a correction begins the day following the March 5 NFP report. (Gold which was down today has been leading the stock mkt by a day or two since Feb 21, so that is a confirmatory indication that the stock mkt will likely correct this week. A second confirmation that a correction is likely is that the day following NFP was a very narrow range day that had little to no upside. We like to call today’s price action a spinning top). But still what we really don’t know is how the mkt will actually trade between Mon-Thursday.

The modeling assumptions I am making are that the mkt corrects after reaching the 1140 price target as I illustrated with the three intraday price correlation models. This “walk-forward” model guesses a correction early this week will then rotate higher on [positive expectation for] jobless claims, followed by another sell off again on Friday’s retail sales [which has a negative expectation]. That would give traders and investors an ABC correction this week. Now, that is my personal script I am sharing with you. The mkt can choose to follow my script or not. If it follows the script, I might be able to make a few bucks. If it does not follow my script, the mkt will chase me out of my trades. No biggie, other trades will certainly come along and present themselves even if my scripting is not validated by the mkt.  

But these are very short term scripts. The shorter term the script is, the more room for error in the scripting. However, with the information (stale data) that we have available to us (vis-a-vis the trend in the job market data, Q4 productivity and decreasing labor costs) the intermediate trend is pointing the stock market higher into and through the Q1 earnings season. So, if a short term ABC correction unfolds into the March 12 retail sales report that holds above the year open at 1114 that would likely provide investors and traders with a short term trend-following buy setup.

So, you have two “walk-forward” models to consider. One is a higher stock market into Friday, and the latter, which I prefer is corrective through Friday. Since the trend is up, a correction into Friday might offer trend followers a buy setup, if the mkt stays bid into Friday, short term traders might consider counter trend setups at new move highs on the year. The key here is for traders to keep an open mind with their scripting and listen to what the mkt tells them. The mkt could opt for either scenario here, the trade setups will follow accordingly.

Event-Driven Research for Risk Managers
John Bougearel
Author of Riding the Storm Out
Registered Commodity Trading Advisor
Director of Financial and Equity Research
Structural Logic, Inc.

312-618-2290

Bloomberg reports European bank and retailing stocks lifted European Markets overnight. The 1114 overnight low in the e-minis set at 1 am CST. Additional mkt strength came in when Q4 productivity was revised higher to 6.9%, above the consensus forecast of 6.2%. Labor costs saw a downward revision to -5.9% vs previous 4.4%.  

The Q4 productivity gains and decrease in labor costs will provide a tailwind for the Q1 10 earnings season. This bodes well for the y-o-y earnings comparisons and sets up stock mkt strength into and through the Q1 earnings season. From Moody’s: “Productivity continues to see enormous gains as firms increase output, in response to strengthening demand, much more quickly than they add labor. At the same time, compensation is falling because of the poor labor market. As a result, unit labor costs saw the largest year-over-year decline on record, adding to profits.”  All told, these are indications the stock market should fare well into May 2010 without much difficulty. On balance, both the “stale” or old news and the forecasts are confirming the trend, thus we find the stock market moving higher in concert with these bullish inputs and trying to look past short term hiccups and “over the valley” of the bearish Feb NFP report due out on March 5 this week.   

The potential for the stock market to do well in March 2010 will be a also function of an improving jobs market. Economists have been asserting that the recent rise in jobless claims are non-recurring weather related and the shutdown of a Toyota plant. ADP is speculating that the jobs market will begin growing in March 2010. This buzz, if it materializes, will help carry the stock market higher into April and May. We will be watching the jobless claims closely in March.  

It now looks clear that the non-recurring jobless claims peaked in the week of Feb 20 at 498k. Today’s Feb 27 jobless claims print of 469k was the best since Feb 6. An improving labor mkt in March and April will carry upside risks to how high the stock market might be able to climb over the next few months.  

Mkt participants should also be aware that the employment indexes in the ISM and Services surveys are showing marked improvement in February, in spite of the East Coast blizzards. The mfg employment index upticked to 56 in Feb from 53 in Jan and the service sector employment index improved to 48.6 from 44.6. Anything over 50 is a sign of job expansion. Taking the two surveys together, the two employment indexes averaged 52 in February, again, in spite of the non-recurring blizzards. This is an indication there are upside risks to these surveys in March when reported in the first week of April.  

All told, the stock market does have to absorb a negative jobs report on Friday March 5. The worst the print in the Feb jobs report due to the blizzards, the greater the upside risks to the March NFP report. The reason for that is that the folks that were laid off in Feb due to blizzards will be put back to work in March and this should also be reflected in the March jobless claims and the March jobs report. As you can see from the NFP chart, the trend is pointing to jobs growth.

Gold reached the same median line this Wednesday morning that capped a rally on Wednesday Feb 17. Traders should also note that this Wednesday high is quite close to the highs of Wed Man 13 and Thursday Jan 14.  While a pause should come as no surprise mid-week, there is good support at the Feb 3 high at 1126 and bullish momentum (red) sloping into 1119 will be a backstop of support to the Feb 3 high.

Event-Driven Research for Risk Managers
John Bougearel
Author of Riding the Storm Out
Registered Commodity Trading Advisor
Director of Financial and Equity Research
Structural Logic, Inc.

312-618-2290

One significant feature to pay attention to is market is transitioning its focus this week. As the EU stabilizes its region, suddenly the jobs front in the US is supposed to improve in March.

So what we have hear is a mkt that is ignoring the short term bad news expected on Fridays NFP report for Feb. That sets up the possibility that whatever downward reaction we get from Thursday’s jobless claims (which could improve if Moody’s is an indication) and Friday’s NFP will get bought. In fact a swing low on Friday could set up a swing trade that persists into the April jobs report and Q1 earnings season in mid-April.

My apologies, sometimes I hit the send button rather than the snag-it screen capture button. The chart below shows the correlation models point the market up into the 1134-1140 area around the time of the NFP report. The NFP report should give pause to this rally as could the jobless claims if they remain elevated. But as noted, whatever interruption we get in this uptrend is apt to be met with buying as mkts begin to discount an anticipated jobs improvement in March.

Event-Driven Research for Risk Managers John Bougearel Author of Riding the Storm Out Registered Commodity Trading Advisor Director of Financial and Equity Research Structural Logic, Inc. 312-618-2290

Goldman Sachs economists estimate a decline of 100,000 payroll jobs. Macroeconomic Advisers is predicting that the blizzard claimed between 150,000 and 220,000 jobs. Larry Summers was interviewed this week on the Feb jobs report saying “who knows, past blizzards have been distorted the numbers by 100-200 jobs.” In short, as much as it wants to start discounting job growth in March jobs report in April. there is no way this mkt can look past Friday’s jobs report. There are downside risks to the consensus for the Feb jobs report and if those downside risks materialize, you will most likely see treasuries higher and equities lower. And given the weather related downside risks for the Feb jobs report on Friday, this entails there may be downside risks to tomorrows jobless claims for the final week of Feb. Once past Friday’s jobs report, I am quite certain the mkt will want to discount the forecasted “job growth” by ADP in March. That will keep the mkt relatively safe into the April jobs and earnings season. The real fuel to begin discounting job growth will likely emerge from reduced jobless claims in subsequent weeks. If jobless claims stay elevated in March, this will limit any mkt rally in the final month of Q1 Event-Driven Research for Risk Managers John Bougearel Author of Riding the Storm Out Registered Commodity Trading Advisor Director of Financial and Equity Research Structural Logic, Inc. 312-618-2290

The nuts and bolts of this equity bull market is almost entirely dependent on the manufacturing sector keeping it alive in 1 H 2010.

Ex-mfg, there is no materially relevant consumer spending growth, Banks are hoarding and credit is contracting at incredible delevering rates signaling deflation remains the primary concern until the private sector restructuring cycle peaks in 2012, state and local govt spending will also be contracting through 2012 if not beyond, and the Fed govt spending via its 2009 ARRA fiscal stimulus package runs dry in July and December 2010.  So God forbid the mfg sector slips or misses a beat in any given month, right.

The details of the ISM shows expansion intact at 56 but below expectations of 57. Significantly new orders fell from 66 to 59, still healthy, but the 20 point gap between new orders and inventories last month narrowed to 12.  The convergence of new orders to inventories is a key ratio to watch. Says Moody's "The gap has been narrowing since late last year and suggests that manufacturing's expansion will moderate over the next few months." On an offsetting upnote, the employment survey in the index expanded to 56 from 53. This will be a bullish input for Friday's NFP report. Moody's says "This lends considerable upside risk to the forecast for a 5,000 decline in manufacturing payrolls in February."

Hmmm, knowing there is now upside risk to Friday's NFP report, we will have to watch to see if that expectations lends support to equities this week.  The models I have been using for this week expect 1114-1120 to act as resistance this week, with weakness building into Friday's NFP as the week matures.

If weakness does not build, then traders should be aware of the chance of an upward drift in equities on the March 5 NFP report. This would also suggest treasuries might begin to weaken ahead of the report. We will monitor the new information and mkt behavior closely as the week unfolds, while sticking with the bullish models that indicate a shift in bull momentum to bearish momentum by end of week knowing full well news like this can provide confirmation drift higher.

Event-Driven Research for Risk Managers
John Bougearel
Author of Riding the Storm Out
Registered Commodity Trading Advisor
Director of Financial and Equity Research
Structural Logic, Inc.

312-618-2290

Note too, how the overnight low on the bearish news of a Greek Bailout held the low set on Friday's GDP and CHI PMI report. This is confirming the upward trend, and the reports on Wednesday Non ISM, Thursday Jobless and Friday NFP, should be neutral to bullish inputs for the treasuries.

The trend remains bullish with all trade above Friday and Mondays db lows at
11818-11819. The Greek bailout on Monday only slowed the strength of last weeks and end of month bull momentum. While some caution is due on a possible double top near or above last week's and last month's highs, until proven otherwise, new move highs and trend continuation should be expected.

Event-Driven Research for Risk Managers
John Bougearel
Author of Riding the Storm Out
Registered Commodity Trading Advisor
Director of Financial and Equity Research
Structural Logic, Inc.

312-618-2290