Can the Markets Follow Through on Thursday's Reversal? We'll Know Soon Enough

There is something unique and powerful about a market reversal. If there is some follow-through in the same direction it could lead to large moves for quite some time.

Thursday saw one of those reversals happen on pretty strong turnover. The overnight low in the S&P 500 futures market tagged 3925, which seemed low enough for buyers to step in to establish their turf. With the economic news of weaker productivity and much higher unit labor costs casting a pall over the markets, that low appeared to hold strong even as a probe down to the 3930 area was approached again during the trading session.

Was there another reason for the market turnaround? Some were pointing to comments from Atlanta Fed President Raphael Bostic, who was emphatic about his view supporting a rate hike of only 25 basis points at the next Fed meeting on March 22. This view is at odds with some of Bostic's colleagues and the markets, which are starting to lean more aggressively toward a 50-basis-point hike at the meeting. True to form, there will be plenty of debate over the next 19 days leading up to the meeting along with some key data points such as the employment situation next week. Early estimates have nonfarm payroll growth in February pegged at 200,000 new jobs, which would follow the exceptionally hot January reading of 517,000. We expect to see that January reading modified.

What caused the shakedown of the bulls overnight Wednesday into Thursday were very hot inflationary data from Europe. However, China delivered positive economic data and it seems buyers just waited to make their move until the selling was done Thursday. Today is a key day for follow-through; the S&P 500 landed right on the 50-day moving average, which was broken last week and continues to be the area of interest for buyers and sellers. Interestingly, yesterday saw another test of the 200-day moving average in the index, and a second consecutive day to hold at 3940. That was a spot we saw held multiple times on Wednesday as well.

Here on Friday morning we received more economic data from Asia as Japan and China had better-than-expected PMI services data. Japan's data were revised upward (from 53.6 to 54) while the Caixin China PMI bolted higher to 55 from the prior month of 52.9. This reflects the fastest expansion in activity since August 2022, a huge reason we hold shares of Coty Inc. (COTY) in the Action Alerts PLUS portfolio. China's re-opening efforts seem to be working, but we will continue to play it with caution as a resurgence in Covid restrictions could happen at any time, which could jeopardize the recovery.

Eurozone services PMI were revised lower to 52.7 in February, but the expansion is still notable with the strongest reading since June. Lastly, the UK delivered modestly higher PMI service for February, and sharply higher than January's reading (53.5 vs 48.7).

Later today in the US we'll get a read on services PMI for February and the ISM non-manufacturing PMI, which is expected to fall slightly but remains expansive. The key metric to watch is how much inflation pressure continues in manufacturing.

Earnings overnight were not as wildly bullish as Wednesday's powerful movers. AAP names Costco (COST) and ChargePoint Holdings (CHPT) delivered results that were not met with enthusiasm. We'll have a much deeper dive into these reports this morning.

Of note, no less than four Fed speakers will make their rounds with speeches today. Inflation, the economy and interest rates are likely to be the main focus of conversation. There's little doubt these comments will move the markets. It has been said that markets do not bottom on a Friday. Perhaps the bottom was Wednesday and Thursday this week, and if so, the bulls may have something to work with.

At the time of publication, Action Alerts PLUS was long CHPT, COST and COTY.