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Lack of Supply or Demand?

June 1, 2011 – 5:03 pm

Another batch of rough economic numbers came in this morning that has spooked the market and has brought the DOW down over 200 points. The first number was the ADP payroll report which showed private companies only added 38,000 jobs last month, which is much lower than the consensus of almost 200,000 additions. Now I have trouble putting too much credence in this report as ADP figures have notoriously been very unreliable in the recent past. However, this does make it less likely that the actual government report on Friday will surprise to the upside. Many banks have brought down their expectations to closer to 100,000 which would be a poor showing.

Along with the jobs figure, a report on manufacturing activity also came in light and showed that it slowed to the worst level since September 2009. However, the index stayed above 50 which still indicates expansion.

There is now a heated debate on the Street about the root cause of these poor economic numbers. Some say that the economic expansion we have experienced over the past two years is running out of steam as housing takes a double dip and QE2 comes to an end this month. Others site the supply disruption in Japan as a cause of the decline in manufacturing and lack of added jobs. The IHS automotive body estimates that the auto sector has a shortage of 400,000 vehicles in inventory right now at current sales paces. This points more to a supply problem as opposed to a lack of demand. Supply can easily be replaced in the coming months, but lack of demand would be a much bigger worry for the markets. I put myself in the camp that this is more of a supply issue than demand erosion. Most supply issues should have been resolved by the end of May, therefore June’s economic numbers should show a strong reversal to the upside if demand is still intact.

On a technical basis the market is still in a strong bull trend, but as with any pullback this trend is being threatened. Be aware of the support levels and keep your outs tight at this point.

Good Trading

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