My prediction that the economic data published in August would be horrible is coming true.
Yesterday’s ISS Manufacturing report may have been better than expected, but it may not ultimately be good enough. The indicator is perched perilously close to levels that signal a recession. Retail sales have posted YoY growth, but it is clear that there is a sequential slowdown going on.
The most important figure to come out thus far, of course, was today’s non-farm payroll number. In addition to payroll growth coming in at zero, there were downward revisions to the prior two months.
Now, just because I was correct about the fact that the data published in September would be bad, does not mean that I will ultimately be proven correct regarding my call that the S&P 500 (^SPX) will test the 950-1,020 area. Reaction to the news can be more important than the news itself.
For this reason, next week is critical. Next week we shall see how market participants are assimilating all of this bad news. If investors take this in stride and focus on the possibility of a Fed rescue, the decline could be halted. However, if fear escalates, we will test and probably penetrate recent lows at around 1,100 on the S&P 500.
I see two additional potential downward catalysts for U.S. stocks (SPY, DIA, QQQ) next week. First, I believe that companies may start issuing profit warnings and lowering guidance. This is something that the market has not had to deal with in a fairly long time. If it occurs, I doubt the market will take it kindly. Second, I think that next week could be a bad news week in Europe. Deteriorating economic conditions in Europe could fan fears of a deepening crisis there and increased risk of global recession.
My short position is not dogmatic. I am bearish regarding the evolution of near-term fundamentals. However, it must be recognized that stocks such as Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), Google (NASDAQ:GOOG), AT&T (NYSE:T), Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD) and even some financials such as XLF and Goldman Sachs (NYSE:GS) represent interesting long-term value at current levels. In particular, as detailed here, stocks are extremely cheap relative to bonds right now.
Thus, next week I will be monitoring not only the news but the reaction to the news. The later is key.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long SPX Puts. I am short TLT and long TBT and SBND.