Positive manufacturing news helped stocks lift off Monday, but traders say it's the Friday jobs report that matters most.
"People were expecting a nice bounce after last week, and it almost seems like they backed off selling and they just let them go up," said Todd Leone of Cowen.
Traders said fund managers using 401 k money were among the buyers Monday. The market could see more of the same heading into the Friday January jobs report, which could contain the first positive jobs number in more than two years.
"The path to least resistance to the Friday jobs report is to the upside," said Scott Redler of T3live.com, who focuses on the market's short term technical moves.
"If we blast through 1100 (on the S&P 500), and the jobs numbers are great, then we're in the same trend we've been in since last year," Redler said, noting stocks have experienced only relatively shallow sell offs since March.
But the market could also sell off on that news. "I'm going to short this rally at around 1102/1108, and if we can't get back to that level then we know the market is weak and we'll look for a bigger correction in coming months," he said.
"I do feel more stocks are technically broken than set up well, and I do feel that we're going to get a 10 to 15 percent correction once we work off this oversold condition, but I'm going to let the market tell me that," Redler said.
Stocks have defied the street's consensus view that the market would be higher early in the year before running into trouble later on. Stocks were expected to gain on better than expected fourth quarter earnings reports, made better by easy comparisons to last year's dismal results. But instead, they sold off in January on what might have been considered good news.
Leone said the market's light volume is a concern."People are very lackluster about this market. I think people think we had a big move last year and they're not sure what to do this year," he said. He said he thought by now, this would be a stock picker's market but instead traders are putting money to work in things like sector ETFs.
The Dow rose 1.2 percent Monday to 10,185, and the S&P rose 1.4 percent to 1089. Besides economic news, the market was pushed higher by a move up in energy stocks, after a strong earnings report from Exxon.
But the big catalyst was the ISM's manufacturing index. It jumped to 58.4 in January from 54.9 in December, better than expected and the highest level since the middle of 2004.
"I thought it was a very strong ISM number. I don't think there's anything goofy in the data. It doesn't look like there's any kind of distortion," said Michael Feroli, an economist with J.P. Morgan.
Fourth quarter GDP, released last Friday, showed growth of 5.7 percent. However, the report was met by skeptics who said the gains were made, mainly on inventories. "ISM tells you demand is actually accelerating going into the first quarter, and the inventory story still has a ways to go and it may expand into hiring," Feroli said.
He expects the January jobs report to show job growth of 20,000, and he expects the unemployment rate to remain unchanged at 10 percent.
What to Watch
Tuesday's data includes pending home sales and factory orders, both at 10 a.m. But the data that will be closely watched are the January sales reports from auto dealers, released throughout the day.
Toyota's sales are a wild card for the industry, since it suspended sales late in the month of models affected by its accelerator recall. The company announced a plan to fix the problem Monday and saw its stock jump nearly 4 percent, its first up day in seven sessions.
There are also several key hearings before Congress Tuesday. Treasury Secretary Timothy Geithner testifies on the Obama Administration's proposed $3.8 trillion budget, at a 10 a.m. hearing before the Senate Finance Committee, while White House Budget Director Peter Orszag testifies before both the Senate and House budget committees.
Former Fed Chairman Paul Volcker testifies in a 2:30 p.m. hearing before Senate Banking committee on the Administration's plan to curb risky activity at banks. Traders will pay close attention to the Volcker hearing as bank stocks moved higher Monday on a report, carried by the Financial Times website, that suggested the plan would be knocked down by Republican opposition.
Earnings are expected from BP, UPS, ADM, Dow Chemical, Emerson, Hershey, Marathon Oil, Automatic Data, Whirlpool and Suncor in the morning. Metlife, Aflac, News Corp and Tesoro report after the bell.
Stocks moved higher Monday, along with other risk assets, while the dollar slumped and Treasurys came under selling pressure. "It was kind of a reversal of what we saw on Friday. There was a lot of flight to quality on the month end rebalancing Friday...We had such good performance in Treasurys and weak performance in equities in the month of January that there was a natural rebalancing," said Brian Edmonds, who heads Treasury trading at Cantor Fitzgerald.
Oil and other commodities rallied across the board as the dollar moved lower. Gold jumped nearly 2 percent to $1104.30 per ounce, and copper climbed 1 percent to $3.0785. Grains also moved higher, led by wheat, up 1.8 percent.
"What you've got going on in crude today is just some retracement and reconsolidation. We've sold off pretty sharply. You have two things that support that. The dollar is giving up gains against the euro, and you've got very good manufacturing numbers out from the ISM today.. Not just the U.S. but globally," said Addison Armstrong of Tradition Energy.
He said, however, there was one index flashing a warning sign. "The Baltic Dry index has completely collapsed over the last week," he said. The index is a measure of global shipping of dry goods, including such commodities as iron ore, cement, fertilizer and grains. On Monday, it lost more than 3 percent as commodities rose and was trading at 2,745. Last week, it lost 11 percent, amid concerns China would pull back on stimulus, hurting the global recovery.
So Goes January?
Stocks started February on an up note after a 3.3 percent decline in the Dow for January. So, the question is will the market follow the old adage "as January goes, so goes the market."
Harris Bank chief investment officer Jack Ablin says maybe not. "Before we cash in our holdings and bemoan our fate, it should be noted that last January the Dow plunged 8.7 percent, only to rebound and close the year more than 22 percent higher," he wrote in a note.
Standard and Poor's senior index analyst Howard Silverblatt points out that in the last 82 Januarys, 52 have been positive for the S&P and 29 have been negative. Of the 52 positive, the market was positive for the year 42 times. He said the data shows that January's performance set the direction for the market 74.1 percent of the time.
Banks have come under a lot of criticism for holding back on lending, and indeed they have tightened standards. On Monday, the Fed's senior loan officer survey showed, however, that the tightening of lending standards has actually slowed, but it's demand that is dead.
Feroli said the types of borrowers that are holding back include big businesses, small businesses and consumers. "We're still seeing loans outstanding contract. It seems to be more that demand is weak. It seems to be pretty broad based," he said.
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