Worries In US, China and Europe Keep Investors Cautious

Investors are losing patience with Europe. The constant back and forth of the situation in Greece has driven them to abandon all of Europe as an investment opportunity. Adding Spain to the mix of conversation and speculation was too much to take on Wednesday. The selling was not the worst, but it was a notice that the May 18th low and bounce may not hold. This is the point we have been watching as the potential pivot point for the major indexes and it remains in play for now. My key concern isn’t Europe, it is the US economy slowing. Each data point continues to show a steady decline since January. There have been some bright spots to help keep the momentum going, but the data is pointing to slower growth and it will be the undoing of US stocks if it continues the trend. Mix in Spain and Europe and you have a distribution day for stocks.

Jobs are the primary focus for the next two days with ADP, jobless claims and the jobs report. The icing on the cake will be the ISM Manufacturing report on Friday. Mix them with the data already disappointing data this week and we set up is for more selling. If the numbers are positive it will help neutralize the European effect on the markets. The estimates are for 150,000 new jobs to be added in May? The challenge for the jobs number is I see them heading lower before they head higher. I am not a predicting type of analyst, but the data isn’t pointing higher short term. Thus, I would be more focused on the negative bias of the economic data and how it will impact the sentiment of the market short term. The longer term view is more optimistic, but investors become short term oriented when fear rises. That said, watch the reaction to the reports good or bad it will give a sound reading on investor sentiment.

The third leg of the worry stool would be China. Will they provide stimulus to boost growth? Will they keep inflation under control? Does anyone really know what is going on in China? The data, like the US, has been steadily falling as the world economy declines. A country essentially dependent on exports would equally decline, wouldn’t it? The picture isn’t positive and a look at the chart of GXC, SPDR S&P China ETF shows a decline of 11.5% after a 4% bounce off the lows. Investors are selling stocks based on the outlook for growth in China. The situation isn’t promising short term, but again, getting investors to look longer term under the current circumstances isn’t an easy task. Thus, the short play for China has been a great play and the current bounce and consolidation is worth watching to see the direction or outcome. The bias is lower, but let this consolidation play out before venturing into high risk positions.

The interesting part of being an observer and investor in the markets is the simple understanding that when things look there worst, they seem to change for the better. We have plenty of cash and we are not exposed to undue market risk at this point. We continue to look at both the up and downside plays. The next two days are setting up the downside to test support of the recent lows. If the jobs data is bad it fulfills the set up. If, the jobs data is better to good, we move higher and test the first resistance levels off the lows. Can you trade that scenario? Absolutely. Will I trade that scenario? Absolutely not. Risk/reward is too high for my taste and when you think you know the answers on the test, be careful they may change all the questions.

Manage your risk short term. The markets at one of those decision points relative to the trend. Predicting the outcome is a dangerous game to play. Stay focused on your goals and be disciplined.