Market Comment - July 6

(Marco Bonelli) How bad is an 80k new payrolls number?

It is bad because, at best, it confirms the current slow growth scenario. 80k new payrolls are far away from even keeping up with population growth and don't contribute to any kind of economic recovery at all (in comparison, the civilian labor force in June was 155.16Mln). With the disappointing June data, the average monthly job gains were 75k, compared to a healthy 226k in Q1.


It is also bad, because it might not be low enough to convince all members of the FOMC to check the QE3 box at the meeting end of July. Beside that, how much economic stimulus would QE3 provide anyway if the whole tool-box of monetary easing measures delivered sub-par growth since the economy officially emerged from the Great Recession?

The rally since the European Summit last week could turn out to be very tricky as many indexes made up a good part of the losses in May, broke above moving averages and other short-term technical levels or built a kind of double-bottom from the June lows - bottom-line, the chart picture improved and raises the question if the market might have put in a bottom. Looking a bit closer and disregarding the early trading losses this morning, various major and industry sector indexes trade close to the short-term downtrend from the highs in April/May. Other sector indexes like in the technology and energy sector also trade close to the uptrend from the October 2011 lows. Then there is the uptrend from March 2009, where some indexes from the retail sector trade at and finally there are the downtrends from the 2007 highs, where indexes in the capital goods, machinery and building material sector as well as the famous Value Line Index trade at. While there is "wiggle-room" of a few percent here and there, all of the mentioned trends pose as a resistance for any further advances, which draws the conclusion that the so-called improved chart picture might be nothing else than a false signal.

Although the labor report is the most discussed topic today, a few profit-warnings in the technology sector delivered a painful reminder of the upcoming earnings season where topics like IT spending cuts, European weakness, currency impact and order cancelations at the end of the month will get discussed in more detail. Earnings growth for Q2 is currently estimated a negative 1.8% and Q3 got sharply reduced to 3.9% (1.4% ex financials) over the last months (growth estimates for Q3 called for 7.0% (4.6%) beginning of April and 9.1% (6.4%) beginning of January). Given the global economic slowdown and the recession in Europe and other parts of the world, the Q2 earnings season and the Q3 outlook might be one of the most defining events for the market direction over the next few months.

Staying defensive may still turn out to be the right strategy as investors might easily get provided better entry points to start building long-term positions.

Trade well and have a great weekend.


(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)