Market Wrap (3/31) & What's on Tap for Wednesday

Now that's what I call quarter-end window dressing at its finest. The S&P closed the day up 1.3% with the Nasdaq outperforming once again to end the session 1.8% higher. Financials led the way with a 3.5% gain as positive news from Barclays in Europe set a positive tone for the rest of the sector. The London-based bank declined to take part in the British Asset Protection Plan, fueling optimism that the sector's operating environment may start to improve. Additionally, Microsoft, a major Nasdaq component, closed 5% higher following an upgrade citing increased PC demand in the U.S. and China.

Stocks closed well off of their session highs as the DOW shed nearly 100 points in the final hour of trading. All three economic reports (the Case-Shiller Composite, Chicago PMI, and Consumer Confidence) released today came in below forecasts. House prices fell 2.8% over the prior month and 19% over the prior year to settle at $146.4K in January. Incidentally, the average price came in just below my $147K estimate documented in my Sunday post. More recent new and existing home sale data show no let up in the contraction during February. Chicago PMI also came in well below estimates at 31.4 against the 35.0 consensus. This number indicates continued and severe contraction in the manufacturing sector. I expected the survey number to improve slightly over the prior month, so this came in below my estimate as well. I now expect the ISM number scheduled for release tomorrow to decline over the prior month mirroring the data released within the Chicago PMI.

Four key reports are scheduled for release tomorrow morning:

1) ADP employment report (Monthly)
Economists utilize this report to gauge private sector job activity to fine-tune their BLS employment report forecasts scheduled for release on Friday. As mentioned in my Sunday post, I expect over 650K jobs lost this month and a rise in unemployment to 8.5%. The official U3 unemployment rate will surpass 10% over the next year. I am not concerned with the exact month-to-month figures given the tendency for large prior month revisions.

2) ISM manufacturing Index (Monthly)
The results should come in below the 36.0 consensus estimate given the data released within the Chicago PMI survey today. I would estimate somewhere around 33, but the point is that the figure will continue to show severe contraction on a nationwide basis. It would take a pretty horrible number to significantly impact the markets given that investors are well aware of the current manufacturing environment.

3) Pending Home Sales (Monthly)
This represents a sale in which a contract is signed, but not yet closed. February pending home sales will likely show a slight improvement over the prior month record low of 80.4. However, any improvement will be attributable to higher foreclosure related sales and unseasonably warm weather. Home sales will remain near record lows and should set new lows in the coming months in response to rising unemployment.

4) Motor Vehicle Sales (Monthly)
The major manufacturers will release their sales totals throughout the day, and I expect to see no improvement in the numbers for March.

Traders should avoid shorting the financial sector ahead of the FASB meeting scheduled for Thursday. Although a probable rule change surrounding mark-to-market accounting has been in the news for several weeks now, the sector may see a rally once the rule change is confirmed. It is difficult to gauge exactly what the market has already priced in, but a confirmed change may lift bank shares in the near-term. Putting this possible rule change aside, there is no significant upside to the market ahead of the Friday BLS Employment Report.