Following two days of strong action, the market is at an important junction as we wait for the September jobs report is at 8.30 am ET. Stocks have bounced back from some intense negativity on Wednesday morning as a deal to delay the debt ceiling was made, but the bears are growling about how bonds are weak and interest rates are rising.
The market has done a fairly good job of dealing with increases in interest rates and has a tendency to embrace the argument that it's 'transitory,' but we will have a test this morning of its impact when the jobs news hits. If the numbers are hot, it will raise concerns about inflationary pressures, but a weak report is going to cause concerns about the pace of the economic recovery. What the market wants is a Goldilocks number that isn't too hot or too cold.
Technically, stocks are working to form a bottom and develop a new uptrend as we head into third-quarter earnings. The jobs news will cause some reaction this morning, but the important issue is that the Wednesday morning lows hold and that a new base of support starts to develop. The indices can afford to give back some of the gains from the last two days, but it is important that dip buyers show some interest and that there are signs of support.
Another aspect of the action that we need to watch is how small-caps, growth names, and secondary stocks act versus the broader market. A big part of the recent corrective action has been a closing of the gap between the indices and the large number of stocks that have been undergoing deep corrections since February. Only about 45% of all stocks are trading over their 200-day simple moving average of price, so it can't be said that they are extended.
The market needs to do more work to set the stage for better action into third-quarter earnings and positive fourth-quarter seasonality. Things are progressing well, and there is still a very high level of nervousness and skepticism, which is a good thing. The ingredients to 'climb a wall of worry' are out there if the price action develops in the right way.
I continue to hold cash levels of around 60%, but I'm looking to ramp up my buying as conditions develop and we start to anticipate earnings. Earnings reports typically trigger more interest in individual stock picking, and that will favor traders like me.
We have a quiet start this morning, but the September jobs report should generate a little volatility.