Market Action, September 2 2010 - Melt-Up

That is what the past few days have been.  Clearly, the market had gotten too pessimistic, including yours truly

The catalyst for the melt-up was Wednesday's ISM survey, coming in at a surprising 56.3, handily beating estimates of under 53.  This contradicted several of the regional surveys – Empire Manufacturing, Philly Fed, Chicago Fed – which were more bearish. 

This morning, Housing Sales were better than expected at +5.2%.  Economists were expecting a decline of 1%.  Retail sales have also come in better than expected.

Hence the melt-up.

(Before we get too carried away with housing sales, housing starts the past three months have been as follows; +5.2%, -2.8%, -29.9%, the latter due to the expiration of the homebuyer tax credit.  Thus, it is difficult to say that the housing market is healthy.)

Clearly, Friday’s jobs number is important, especially given the illiquidity in the market.  I said to a colleague this morning that I thought the payrolls data had the ability to move the market much higher.  My rationale was that with pessimism so high and expectations ratcheted down so much, there was a good chance for an upside surprise. 

Given the market action today, however, the bar has been raised for nonfarm payrolls to move the market higher.  The Russell 2000 is up 5% in two days and nearly 8% from its intra-day low last week.  The index is now trading in the middle of its recent trading range.  Likewise, the S&P 500 has clawed back half its losses from August.  The S&P 500 appears to be trading in a well-defined range between 1040 and 1130, and is right back in the middle at 1090.  If the jobs report disappoints, the market could snap back and reverse the gains of the last two days. 

Also bullish for the market has been the reversal of two week groups – banks and the semiconductors.  Unlike the broad indices, both broke down through support last month.  However, both rallied hard Wednesday and Thursday, with the BKX up over 7% from the lows on Tuesday the SOX up 6%.

I am short the semiconductors, which is an industry call, not a market call.  I have traded this group successfully over the past 15 years, and it has been my experience that the first piece of bad news is not usually the last.  It is likely more bad news is coming after Intel’s warning and Cisco’s cautious comments last month.

But will it matter?  Maybe not.  Right now, everything trades off macros.  Correlations are all converging to one.  If the risk trade is back on, industry fundamentals may be irrelevant.

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