Weighing the Week Ahead: Jobs in Focus

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 |  Includes: DIA, QQQ, SPY
by: Jeff Miller

Jobs are vital. To the individual. To the economy. To all of us, since our own well-being depends upon our neighbor's -- whether we realize it or not. Each piece of data or news on employment commands attention.

For these reasons everyone pays special attention to the monthly Employment Situation Report. Despite the imperfect nature of the information, it is regarded as "official" by media and market pundits, and has more market-moving potential than any other data.

This week's look ahead rightly focuses on employment, but the market reaction will not come until next week. Why? The report will be announced on Friday -- a rare instance of a market holiday when the Federal government has business as usual. This will lead many to a conservative, position-squaring posture in the abbreviated trading week.

Last Week's Action

Here is my take on the key data from last week. I make no effort to be comprehensive, nor am I taking a viewpoint. I will highlight what I found significant, trying to be objective.

The Good

There was a little good news.

  • US stocks. The market continued higher, shrugging off the well-documented laundry lists of worries. We highlighted this last week. Right on cue, Todd Harrison provided us with ten reasons this is not a bull market (some of which seem inconsistent) and immediately snagged air time on Bloomberg radio and TV, where he did a very nice spot. Doug Kass doubled him up with 20 reasons. Not only did the Kass piece capture TheStreet.com audience, but it was the third-most popular referral for the week at Abnormal Returns (a helpful new feature).
  • Fed Exit Strategy. Fed Chair Ben Bernanke testified about the Fed's exit strategy. Many of us free-market types have a valid concern about the extent of government monetary stimulus and when it will be withdrawn. For those who want to make profitable investments, regardless of politics, I recommend reading the wise counsel of Bob McTeer:

There is no cost to taxpayers to leaving the enlarged balance sheet approximately as it is and focusing policy on future needs. Actually, the enlarged balance sheet has been a boon to taxpayers since it has increased Fed profits that are turned over to the Treasury’s general fund. Shrinking the balance sheet would reduce those supplements to tax revenues in the future. People on financial TV continue to treat net Fed lending as a cost to taxpayers. The opposite is true.

He sees no need for immediate asset sales. I strongly recommend reading the entire article -- especially if you are a free-market conservative Republican.

  • ECRI Index Uptick. The ECRI leading indicators have been in positive territory for many months. Recently the index has been at levels not seen for ten years. Not surprisingly, it pulled back from extreme highs -- still at extremely bullish levels. Those of a bearish persuasion have fixated on the index decline, despite the extreme bullish reading. This week's reading (via the Pragmatic Capitalist) shows an uptick, and Lakshman Achuthan says "With the WLI close to an all-time high, a double dip remains out of the question."

The Bad

There was -- as usual -- some bad economic news.

  • Existing home sales declined in February. Calculated Risk covered the initial story and also highlighted the impact on inventory.
  • Housing assistance programs. The latest version involves principal forgiveness. Some of those involved in the program design and administration are professors. For more insight into these disturbing facts, check out the Diana Olick blog (spoiler alert - she's bearish on housing, hates all government programs, and sees no hope until Joe SixPack moves out).

The Ugly

This week's "ugly award" is a tie.

Interest rates. Nearly everyone has expected long-term rates to move higher. This week saw a big move in the benchmark 10-year note. Higher interest rates make stocks less attractive as an asset choice and also increase costs of corporate financing. Many fear that the Fed exit strategy, especially the end of quantitative easing, will lead to additional interest rate pressure on the long end. Also, few seem to celebrate the positively-sloped yield curve, including those intellectual flip-floppers who worried about the inverted curve a few years ago.

The Senate. They left on vacation (AKA "recess") without extending unemployment benefits. Each party found a reason to blame the other. News stories report that everyone is exhausted after the health care debate.

The Week Ahead

I expect a quiet week in front of the employment report. For me, Thursday's ISM manufacturing survey is the most important piece of new information. I use this as part of my monthly employment preview. I usually do this on the Wednesday before the Friday report, but that will not be possible this week. I might make a guesstimate based upon the Chicago ISM data, released on Wednesday.

There will be other employment forecasts, including ADP's, during the week. The political front should be quiet, except for Tea Party rallies and the like.

Our Trading Forecast

Our own indicators are now bullish, and that was our vote in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:

  • 87% (up dramatically from 27% last week) of our ETF's have positive ratings. This is very strong, and improving.
  • The median strength is +24 (up strongly from -15 last week).
  • 80% (down slightly from 89%) of the sectors are in the "penalty box," showing a continued high level of risk.
  • Our Index Package now has a positive rating, consistent with a small gain in the market over the next three weeks.

Investment Implications

I am still shopping for health care stocks. My technology and cyclical plays continue to do well. There could be some thin trading and therefore some opportunities late in the week.

I would be more specific if possible, but it is a time to have and use a watch list for possible buys.