Daily Commentary: June 07, 2024

Auto Post1Option Commentary

Solid Job Growth Is Bad

Posted by Pete Stolcers on June 07

The market is declining after the jobs report came in better than expected.

PRE-OPEN MARKET COMMENTS FRIDAY – This morning we learned that 275K jobs were added during the month of May and wages increased .4%. The S&P 500 is down 30+ points on the news.

This number suggests that the economy is strong and that the Fed will not cut rates soon. Wages are the largest input cost for employers and they rose more than expected (.3%). That suggests that inflation is still stubborn.

I’m not a believer that “bad news is good news” and that the market will benefit from a weaker economic backdrop because the Fed will be in easing mode. We want strong economic growth so that the Fed does not have to cut rates. If inflation starts to ease, this is the most bullish backdrop we can hope for. This report is good news for the market on a longer-term basis.

When the Fed is forced to cut rates because of deteriorating economic conditions there is a temporary “sugar high” that “big brother” is ready to stimulate the economy. That only lasts a couple of months and as conditions continue to soften, the celebration sours. Investors start to worry that the Fed waited to long to cut and that we are heading into a recession. From a longer-term perspective, we don’t want this to play out.

I don’t currently see a scenario that excites buyers at the all-time high. Stock valuations are fairly rich, growth is softening (Q2 GDP), inflation is stubborn and the Fed is not going to cut rates anytime soon. At the all-time high there is no reason for Asset Managers to chase stocks.

This is consistent with the price action we have seen the last two months. The upward momentum has slowed and we had a pullback in April. The bounce was meager and we made a marginal new high. That suggests that the selling pressure will keep a lid on the action. I believe the market is going to spend the summer in a trading range.

The only thing that could change that is a reduction in quantitative tightening (QT) by the Fed next week along with a nice drop in CPI. This combination would be bullish, but I view it as unlikely.

I’m not bearish. I am neutral to slightly bullish. The best buying opportunities this summer will come on dips.

The previous all-time high was SPY $533 and we are going to test that breakout this morning. The most likely scenario is that we test that support and we bounce off of it. This was a good jobs report. If the selling pressure accelerates, we will have a failed breakout on a D1 basis and we will drift back into the prior range.

I don’t have any conviction at this level given the price action I’ve seen recently. The breakout Wednesday came on light volume and we have instantly given those gains back this morning. This is a time to keep your trading light. Swing traders can sell bullish put spreads on strong stocks. Day traders should go with the flow on any given day. Don’t get locked in to one side or the other and keep your size small.

Support is at SPY $533 and resistance is at the high from Thursday.

Live Trading

Open an Account

Paper Trading