Headwinds Persist

Markets and momentum go hand in hand. Uncertainty in the economy creates volatility in the markets and what's been happening so far this year shows the fears that people are starting to recognize about the fragility and potentially unreliable nature of the current recovery -- not so much that a double dip recession is likely but that the STRENGTH of the recovery may be more muted and that it may take longer to pan out than expected (whereas the market rally of 2009 reflected a near V-shaped recovery expectation).

Suprisingly, it could be argued that we are currently on course for the V-shaped recovery. But there are doubts and that is what helps explain the recent 7% pullback in 2010. After the state of the union, the Administration did a strong job of returning the focus (and the PROMISE) to restoring jobs in America. This gave a nice bounce in the markets. However, the more longterm and realistic headwinds have persisted and returned to the forefront: (1) Greece, Portugal and potentially other countries experiencing serious sovereign debt problems (and potential default really); and (2) the jobs picture.

The jobs picture gets a big verdict tomorrow morning when January (un)employment figures are released -- with expectations and hopes for the first report of actual JOB CREATION in years. But last month showed continued losses (when gains were hoped for) and the jobs picture has refused to hit the inflection point may are waiting for.

If tomorrow produces a positive number, the market momentum should adjust to stop the downward slide at least. The interesting question will be if the downward slide then resumes thereafter. After all, bulls are becoming more skeptical of their own rally and have started demanding more evidence of strong economic recovery than simply 1 time reports or earnings. Actual trends of growth are required now (which is what we're seeing in the manufacturing sector, even if it is minimal growth and driven partially by stimulus).

If the jobs number is negative, then I believe we could be headed toward a retracement to the 200 day moving average, which currently sits around 1020 on the S&P. That would be somewhere around a 12% dip from this rally's highs. An official correction is 10%.