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Politics and data could throw wrench into bear case

Dr. Joe Duarte
0 Comments| November 5, 2009

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The S&P 500 and the S&P 500 SPDR ETF (NYSE: SPY, Stock Forum) are dancing between the 20 and 50-day moving averages. Intraday volatility is rising. And we are in the midst of a very important week. That means that anything is possible. Yet, as more time passes, the odds of a major market crash are diminishing as downside momentum is starting to dissipate. And if Friday's employment report is way better than expected, we could see a reigniting of the stock market's rally, perhaps for the rest of the year.

Click to enlarge
Chart Courtesy of StockCharts.com

The better-than-expected economic news began to filter in on Wednesday morning as Mortgage applications rose, and the Challenger Job Cuts report showed a 51% reduction in job cuts compared to 2008. The ADP Employment report will also be released before the stock market opens. The Fed will make its latest interest rate announcement in the afternoon. And in between, we’ll get all kinds of other goodies that could move the market, including the U.S. Energy Information Agency oil supply report.

Click to enlarge
Chart Courtesy of StockCharts.com

Thursday we get jobless claims and the Monster Employment Index, both a prelude to the big number of the week, the employment report on Friday morning. Throw in a few earnings reports, the fallout and the spin from two important gubernatorial elections, and perhaps a merger or two, as we’ve seen lately, and you’ve got the potential for all kinds of mischief, misdirection and volatility.

Yet, as we look at two of our employment bellwethers, Manpower Inc. (NYSE: MAN, Stock Forum) and Administaff (NYSE: ASF, Stock Forum), Wall Street's expectations are very clear. Both stocks have hit the skids, losing 25% and 12%, respectively, compared to the relative tame 5% decrease in the S & P 500.

Click to enlarge
Chart Courtesy of StockCharts.com

What this says is that Wall Street remains concerned about jobs, as exemplified by Manpower's big decline, and the fate of small businesses, as Administaff's shares indicate. But, there is some data now that suggests that Wall Street may be wrong on the fate of the employment situation, which makes Friday's employment report a potentially explosive one for the market, especially if the payroll number is better than the consensus of 175,000 job losses. The range is quite wide, though, with estimates extending from 55,000 to 200,000.

Administaff's earnings, released on November 3rd, are still indicative of the current climate, but are not that bearish, which is why watching the stock over the next few days is worthwhile. The company reported decreased revenues, and earnings, and a 16% decrease in year-over-year profits based on "an expected 9.9% decrease in the average number of worksite employees paid per month, partially offset by a 2.8% increase in revenues per worksite employee per month," and "higher benefits costs in the 2009 period due to higher utilization of health benefits by worksite employees, including large claim activity and increased COBRA participation," according to the company's earnings news release.

There is a glimmer of hope in the company's survey of small businesses, as "61% of participants said they are maintaining current staffing levels, while 28% are adding new positions, up from 23% three months ago and 18% six months ago. Layoffs were named by 11% as a current management strategy versus 16% in July and 19% last May."

Still, as Administaff points out in a separate news release, signs of improvement in small businesses are still tepid as "More than 52% of small business owners expect an economic turnaround in 2010, while 13% indicate that a rebound is happening now, and 21% think the recovery will be in 2011 or later."

Other survey results are increasingly important in the wake of the election results from last night, as "The economy was listed by 76% of business owners as one of their biggest short-term concerns, down from 83% in July, followed by 50% citing government health care reform, 41% listing controlling operating costs and 39% specifying rising health care costs. However, for the longer-term, those who said they were “very concerned” once again listed the economy in fourth place at 41%, whereas 47% named government expansion and the effect on business as the leading issue, 45% cited potential tax increases as second and nearly 42% designated the federal deficit and the total national debt as third."

The real question for investors is whether we’ve gone anywhere lately. And the answer is maybe, at best. The S&P 500 has fallen below its 50-day moving average but has not really broken below the 1040 level convincingly enough to bring out the big bears. What we’ve seen are minor forays and probes by traders trying to see if the market will break. So far it hasn’t broken. And that means that as time passes, the news ahead will likely influence the way things turn out.

Conclusion

We’ve had a 5% correction in the S&P 500 over the last two weeks. We’ve seen profit taking in the big Nasdaq technology stocks. And yet, we have not seen a real honest to goodness market breakdown.

Now we've had Republicans make gains in two important gubernatorial elections, but not in a key House of Representatives election in New York, which leaves the question of whether the results in Virginia and New Jersey can be seen as a "referendum" on Obama policies.

There are some glimmers of hope in the employment picture, albeit small ones. Still, a lot depends on what the Federal Reserve says and does with regard to interest rates. And unless the Fed is out of its mind, it won't likely say or do anything ridiculous in this climate.

So for investors, it looks as if the longer the market holds up, the least likely is the chance that we’ll see a crash in the short term, barring news or an external event. In other words, the bears are running out of time. If they don’t overwhelm the bulls within the next few days, the up trend is likely to reassert itself. Still, it’s foolish to make any huge bets before Friday’s employment report.

Read more Stockhouse articles by Dr. Joe Duarte



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