Market Loves the News – Buy Calls Now – Strong Growth and Tame Inflation
POSTED BY PETE STOLCERS ON MARCH 9
The market has regained its footing and the price action this week has been very constructive. We have seen a series of lower opens and higher closes. This bullish pattern has been present since the market tested the 100-day moving average a week ago. We still have a couple of speed bumps to get through, but I am in “buy the dip” mode.
ADP was released earlier this week and 234,000 new jobs were created in the private sector during the month of February. This is a very strong number and I’m expecting similar from the jobs report today. Traders will be watching the wage component and any spike could be problematic. I feel that this component could be “hot”, but it will subside in future months. Corporations paid bonuses and increased wages after the tax cut and this event has temporarily put upward pressure on wages.
The unemployment report was just released and 313,000 new jobs were created. That is a very strong number and wages only increased .1%. Last month’s wage component was also lowered. The S&P 500 rallied 20 points on the news.
The largest catalyst for inflation is wages. This is the biggest input cost for producers and they have to raise prices to maintain margins. Workers who have more money spend it and that demand also puts upward pressure on prices. Now that the number has been released we don’t have to worry about wage inflation.
Inflation has been negligible in the last decade and we are still not seeing upward pressure on prices (CPI, PPI and PCE). Oil has been weak and that has helped to contain price inflation. The greatest concern was that the Fed will have to aggressively tighten if their 2% inflation target is exceeded. That concern is off the table now.
It is important to keep yields in perspective. By the end of the year US 10-year Treasuries will still be around 3%. That is low from a historical perspective and interest rates can move much higher before they impede economic growth. As long as our economy is robust and inflation is moderate the market can shoulder tightening. ISM manufacturing and ISM services were very strong. Employment is incredibly strong. Inflation is contained and the market should be off to the races.
Swing traders should buy on the open this morning. Use the 50-day moving average on the SPY as your stop on a closing basis. I believe we could challenge the all-time high in the next month.
Day traders need to be patient in the early going. There is small resistance at SPY $275.70. I believe that any dip will be brief and shallow. Look for opportunities to get long early in the day.
Strong economic growth with tame inflation will take some of the pressure off of the FOMC meeting. Higher interest rates will be shouldered by the market.
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