Morning Market Thoughts
Good morning. Once again, it’s looking like a sluggish open, with weakness in Asian markets, and Mario Draghi stating that the ECB expects rates to be steady or lower for an extended period. Also, weak jobs numbers were posted by ADP — forecasting an increase of 2,000 initial jobless claims from the prior weak. Now, tomorrow’s employment picture that’s always published by the Department of Labor on the first Friday of each month will be closely watched. The way I see it, a positive number will give the Fed a reason to hike rates. The FOMC will be breathing a huge sigh of relief. If the jobs number is poor, then the Fed really can’t credibly explain why they are going to raise rates in a couple of weeks. That’s not to say that they won’t raise them (I’m pretty sure that they will, because several Fed heads have outright criticized the markets for not pricing in a June hike).But here is the rub:
A weak number might make the market bullish on stocks because of the conjecture that the Fed will stand pat. But then…if the Fed stands pat, it’s because things are not improving very much. Bearish!!
Alternatively, a strong number might make the market bearish on stocks because of the conjecture that the Fed will hike rates, and that’s equivalent to taking the spiked punch bowl away from the party. But then…if the Fed hikes rates, the financial sector should improve because the commodity that they deal in (i.e., money) is actually starting to be worth something, so they can start making money. And we need improving financials for higher market prices.
So you can see that this is a bit of a Rorschach Test — there’s something in there for everybody. Bulls will see something to justify their bullishness, and bears will see ample justification for their bearishness.
In my world, I’m thinking that about 25-30% of an active portfolio can be in stocks…and increasing to higher levels of participation if the market breaks out. The rest? Cash. Cash is the ultimate hedge against big downside moves. And when you put stops into your trading methodology, even the loosest stops, combined with your cash, will keep you out of harm’s way. Remember, the Russell 2000 Small Cap Index and the S&P Midcap Trust (MDY) are breaking out. Strong small- and mid-cap indexes reflect an underlying demand for stocks. You’re not really seeing it in obvious ways, but take a look at the Industrial Sector (XLI — an Industrial ETF). Stocks like TYC, RTN, SNA, ALLE, LMT, ITW, and XYL are looking strong (or about to be strong).
Look at Textron (TXT) — this under-watched (by me) aerospace/defense stock is close to breaking out of a low-volume consolidation pattern just below the 200-day moving average.
So there are indeed stocks to be involved in. We just need to look a bit harder…or be more patient with the ones that we have.
See you in the forum.
Dan
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