The
S&P ended the month of May up more than 2%, ending Friday at new all-time
highs of 1923, but the week ahead could determine where the market goes over
the next month. The two most
important macro-economic events of the week come Thursday and Friday morning. First on Thursday, European Central
Bank (ECB) President Mario Draghi will do his best Ben Bernanke presentation,
when many investors are expecting him to announce the European version of
quantitative easing to better fight stagnant deflation. The iShares MSCI Emerging Markets EFT
(EEM), which tracks European markets is about 15% off the lows of the year made
in February, while the S&P is up just 8.5% in the same time. I think the move in the emerging market
stocks is overdone and the rally over the last four months has been all about
Draghi announcing quantitative easing on Thursday, which should be a “sell the
news” event. Additionally, the EEM
daily chart looks tired. While the
S&P has been making new highs almost daily last week, the EEM was down
1.3%, closing on the low for the week.
Since making a yearly low on February 3rd, the EEM has also
completed a 5th wave up on a daily and weekly chart, which is a
bearish indicator. For a
short-term trade, I recommend actually selling the EEM short against $44, which
would be the highest level since January 2013. I am looking for a move lower to $40, which implies a drop
of more than 6%. Even if Draghi
doesn’t announce quantitative easing, investors will be concerned that
deflation will continue to hinder economic growth, and that alone should send
investors running for the hills.
The
other big event of the week comes Friday morning, with the announcement of May
non-farm payrolls. Given last
month’s strength and much improved weather conditions, economists are expecting
another strong month. Currently,
economists are calling for 200,000 jobs and the unemployment rate increasing
from 6.3% to 6.4% due to more people looking for jobs. I’m not so much concerned about the
actual number or the rate. I
want to see wage growth and stronger labor market participation. Inflation is slowly starting to pick
up, and if wage inflation doesn’t move with it, that means less purchasing
power for consumers, which would lead to lower GDP, slower sales growth and a
weaker housing recovery. Unless
the wage growth and job participation numbers greatly surprise to the upside, I
think the market sells off on Friday.
But I see the S&P rallying throughout the week so any sell-off on
Friday will likely just eat into some of the weekly gains. If you are looking to take on new stock
positions, I would wait until Friday morning and look to pick up your stocks on
a sell-off.
Last
week I mentioned keeping an eye on the Russell 2000 (RUT) because the small cap
index will determine the path of the broader market. The Russell was up 2.8% last week, gapping up on Wednesday
morning above a key downtrend line and above the 200 day moving average. Continue watching the Russell because I
think it continues higher again this week, which will rally the same tech
stocks that rallied last week like Google, Facebook, Netflix, etc…
Thursday
and Friday will be important days in the market. For a trade, selling the EEM could give you a 6% return in
just a few short weeks. Use what I
think will be a sell-off on Friday’s unemployment data to add to current positions
or build new ones.
My current positions: Long
Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation
(SPWR), Starbucks (SBUX), Macy’s (M), Boeing (BA), Disney (DIS), Google (GOOGL),
Facebook (FB), long COPPER.
Jeff Lewison
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