After 6 consecutive down days the market is having an oversold bounce. The unemployment claims data is still elevated at 427K. If we take cues from the May jobs report, this should correspond to a private jobs growth rate of between 50K-100K per month.
The big question now is how deep will this current pullback in the market be and when will it end. Here are some of the key data points I will be looking at
- Unemployment Claims – The unemployment claims data was one of the first set of data points which warned us about possible softening in the labor market. The claims data started getting weaker around early April, so it gave us an early warning sign. The data is pretty volatile so it is best to take an average of 3-4 weeks. What I want to see is a drop back below 400K/week for a bullish stance and if we start getting above 450K/week that could signal a bigger sell off.
- Earnings Warnings – Earnings have been the prime driver of the rally from the March 2009 lows. Earnings are getting a lift from cost cutting and global growth. Even though we the US economy could weaken, earnings might still be able to grow based on global growth. We are getting close to the 2nd quarter earnings confession season as we approach the end of June. I am expecting we may have some more earnings warning this time, the key really will be the magnitude of the miss. If it is a very minor miss like the one Texas Instrument (TXN) had yesterday it will not be very negative as we have already sold off 6% from the highs. Currently my viewpoint is that you will see minor misses in revenues and earnings. Therefore I am not expecting the current pullback in the market turning into a full fledged bear market(20%+ pullback from the high). If we do start seeing some big revenue shortfalls then I will have to change my viewpoint and it might be an early indicator that international growth is also slowing down.
- Commodity prices – Although commodity prices hurt consumers, higher commodity prices to do send a signal about demand and if demand is high that means there is more economic activity. Commodity prices have actually held up relatively well over the last few weeks. If we start seeing very strong sell offs in commodity prices then one has to worry about possibly stronger weakness in the global economy. I worry about the situation in Chinese real estate and I think Copper would be a good indicator if there is a slowdown in Chinese real estate. So far though Copper is holding up quite well.