After two days of heavy selling pressure, stocks bounced on Thursday following a weaker-than-expected PMI Nonmanufacturing report. The numbers were surprisingly weak, but market players were already so pessimistic there wasn't that much additional selling pressure.
In addition to the technical reaction to the news, market players seized on the narrative that the economic weakness makes it more likely that the Fed will become increasingly dovish. The market now anticipates that there will be two more quarter-point cuts before the end of the year.
This morning, the September jobs news will be released -- and that will further influence the market view of what the Fed might do.
The Fed doesn't seem to be embracing the idea of an impending recession at this point, but the market is obviously growing increasingly concerned. Fed Vice Chair Richard Clarida said on Thursday that the chances of a recession are not high if the Fed sticks with the right monetary policy. Many market players are very skeptical of that view -- and that is why we are seeing strong reactions to economic news lately.
The market will be contemplating jobs news and the Fed this morning, but it is China trade headlines that are going to present the biggest difficult for market players. Larry Kudlow is scheduled to appear on Bloomberg TV this morning and will likely make comments about what he expects from the trade negotiations that start next week.
While there appears to be a very high level of doubt that a trade deal will be made soon, the possibility of progress is what is preventing the skeptics and the bears from pressing their bets. If the negotiations blow up again, as they did previously, there is very likely to be an ugly market response.
This combination of macro uncertainty combined with a market under technical pressure is going to make it very tough for the bulls to make progress. We also have the added complexity of the very severe sector rotation that I've been discussing lately. There has been a rolling correction taking place for a while -- and it is now showing up to a greater degree in the indices.
It is a tough trading market and there is little choice but to approach it very carefully. I'm trying to knock out a few small, fast trades and am avoiding the temptation to build bigger positions in hopes of near-term upside. With earnings season coming in a couple of weeks, there will be good catalysts for individual stock picking. But, like most everything in the market, timing will be key.
We have some weakness in the early going, but the jobs news at 8.30 a.m. ET will produce some movement.