Squawk Morning Briefing: Contradictions

By the time you read this briefing, it is likely that the monthly ADP report will be released setting expectations for the May Nonfarm Payroll numbers released on Friday.   Traders who pay attention knew these numbers were coming since they occur the same time each month.  Furthermore, expectations may be for a weak number since weekly jobless claims disappointed throughout the month.   One can also make the case for weak ISM Manufacturing results at 10:00 am EDT since regional Fed surveys and Chicago PMI have been soft.  Nevertheless, we have witnessed a week-long rise in equities in anticipation of these results.

Economic data looked comparatively rosier at the beginning of May during the early stages of a choppy decline that lasted most of the month.  This underscores our belief that new reports are not a reliable way to set expectations for the market.   We have often stated that it’s the reaction to the news that matters, but even that doesn’t tell the whole story.  In our analysis of the DJIA, a drop of 100 points or so would seem to complete a correction and set the stage for another advance.   At the same time, a positive reaction to the news would likely break some technical levels and further reinforce a bullish outlook.  The most bearish outcome would be a significant drop goes far beyond what we would expect from a correction.

It seems a contradiction that we would go up on poor numbers, but the broader wave count sets the expectations.   At least for the moment the best interpretation of the count is that markets are only prepared to go down in a choppy, corrective manner and that helps to keep the upside open.

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