Jobs Spark a New Rally

SUMMARY:

- Jobs defy other indications, beat expectations, spark a new rally, but again the market finds it hard to hold.
- Slowest economic recovery outside the Great Depression shows jobs improvement, but with jobless claims surging, can it last.
- Gold rebounds but oil and other commodities continue their struggle.
- NASDAQ and SP500 move again above the February high but cannot seal the deal. Still in good shape, but have to prove they want to move higher.

MARKET SUMMARY

Market gets its catalyst to move higher and does, but it cannot hold the move.

Thursday was a volatile session, and Friday was no slouch itself. The jobs report topped expectations and stocks surged higher. Futures were up and stocks gapped higher on the open, looking very solid. They tested and then rallied to a new high that took NASDAQ and the SP500 above the February peak once again. Then they started to test. Right before lunch they started a long downtrend that lasted through the afternoon session and into the last hour. It took SP500 almost to negative. It dropped both NASDAQ and SP500 below the February peak. The market rallied back in that last hour to make things look fairly decent. They did just manage to break through that downtrend of the afternoon, but they were still well off the highs at the close.

NASDAQ lost over 40 points off of its high before that late rebound. The Dow lost close to 200 points off of its high before it, too, managed to bounce late on the session. All the indices managed to post gains on the day. NASDAQ, +0.5%; SP500, +0.4%; Dow, +0.43%; SP600, +0.4%; SOX, +0.75%; NASDAQ 100, +0.34%.

There were some great moves, up 1% or more on the session. It certainly did not finish that way as investors did not know if they wanted to keep stocks moving higher ahead of the weekend. There is still enough confusion with the economic data even with the jobs report. As a matter of fact, there is some confusion with the jobs report itself. Given a week that was marked by many misstatements about what exactly happened with the killing of Osama Bin Laden, it was only fitting that there was indecision and internal inconsistencies with economic reports and other actions with respect to the economic and financial markets.

It was an amazing week without a doubt, starting with the Osama Bin Laden shooting. It was somewhat diminished by the incredibly divergent stories coming out of the people within the administration even who actually ordered the strike itself. Nonetheless, it was a great achievement. On that Monday, the market was not able to hold the move on the news, however. It gapped and rolled over. That was okay. The market had rallied well in the first two weeks of earnings, and it broke out of the February highs and was ready to test. It did make the test, and we were looking for that. I was pleased with what I was seeing.

Thursday was wild. That was when we ECB did not raise interest rates and did not say magic words with respect to “remaining vigil’” on its interest rate and watch over inflation. That put the markets in a tailspin. What did the ECB know that they did not? Were things getting worse an expected? There were concerns about a slowdown in China with its stock market tumbling for over two weeks with straight declines. There was a concern that perhaps it had gone too far in its austerity plans and there was going to be a slowdown in that economy. All it needed was the ECB to not raise rates and hedge its bets a bit, and the commodities markets sold off like a stone.

Oil, gold, and silver all fell sharply on Thursday. It was quite a dramatic decline. Of course silver had been falling the entire week. Thursday was pretty much the crescendo move where it hit its bottom, so to speak, near term. It has been such a dramatic decline. Equally impressive was the dollar’s explosion to the upside. If the ECB stopped raising rates and was concerned, that made the dollar more interesting from a safety standpoint if nothing else. The dollar surged and, of course, the surge exacerbated the decline in dollar-denominated commodities such as oil.

Friday was a bit of a disappointment, but in the end, the market did as expected on the week. In other words, it tested the breakout above the February peaks. The indices came below the February high, but that does not necessarily mean they will not be able to continue to the upside. There were plenty of surprises along the way this week, so it was not just a normal pullback as it looked to be. Come Tuesday and even Wednesday, things got a little dicey as the week wore on. In the end, once again, it has made the pullback. It is still in a position to rally even though on Friday both SP500 and NASDAQ gave up recoveries above the February high. They were once again unable to hold a rally on good news.

That was understandable on Monday because the market was at the apex of the run. On Friday it was not such great action because the market had spent the week pulling back. It was at a logical support level and got a catalyst; it had the impetus to move back to the upside. The indices did move higher, but they just could not hold that definitive move. That cast a bit of a question with what happens next week in the market. A little question.

Overall, the indices are still in good shape to move higher. There is reason to, not the least of which is the Fed still injecting money into the economies with its liquidity pump. Even though QE II will officially end, we also know the Fed will maintain its balance sheet. It will have to keep reinvesting the money it makes on all of those mortgage-backed securities and other piles of crap that it put on its balance sheet in order to help the financial institutions recover from sure collapse. Some of them probably should have collapsed judging by the way they ran their business before the financial crisis and by their complete inability to make money even when getting free money from the Fed after the economic crisis

MONDAY

The indices are holding a pullback. They are at a point where they should make the break if they are going to. We have a nice rally, an inverted head and shoulders, a breakout, and a test of that breakout. Again, if they are going to move up, this is where they should do it. We will get answers and some closure. Some stocks are in great position to move higher. We have several and they are just outstanding. We even picked up some partial positions on Friday. They looked solid and were holding their moves. We want to be ready for next week in case the market continues higher.

This will be an important week. Either the market will continue higher or it will not. Either the techs and new leaders setting up will push to the front and take leadership or they will not. If they do not, I am not sure who will come up. The XLF is the financial services EFF. It looks interesting. It is setting up a triangle. It is a descending triangle, but those can give way to nice breaks to the upside. I would like to see a pullback down to the bottom level, maybe undercut it a bit and then reverse. What a great entry point that would be. Risk/reward would be fantastic. If it breaks out, you have plenty of upside. I would be more than happy to be in that, but we have to see it actually make the move.

Some insurance stocks look good, as one subscriber noted, but not all of them. ALL looks nice. A great breakout and a flag-pattern test of that breakout of a nice, flat trading range. Again, we will have to find some leadership to break these stock indices higher. Techs could fill the bill. Earnings are running out. We will still have earnings over the next couple of weeks. It is not a one-month event anymore, but they are waning. The market knows the gist of earnings, so it will not get that excited about what comes out.

It still wants to see more good earnings. We are looking for another catalyst. We have had the jobs report, and it could not do it. It will just have to be the old-fashioned belief in what the market will do. That would be growing earnings over the summer to warrant higher stock prices. The question is whether investors will be ready to do that. There could be a feeling that earnings will move higher, or it could be a slow summer where the adage “Sell in May then go away” comes to fruition.

In terms of economic reports next week, nothing gets going until Tuesday. We do not have much. Import and export prices are interesting. It will be interesting to see what that does with respect to energy costs. Wednesday is slow. We get the trade balance and Treasury budget. Important, but no one seems to pay much attention to them. Thursday will be much more important with the jobless claims. They bumped expectations to over 400K. We will get the PPI, and that will be really important. Of course there are retail sales. We had the Same Store Sales out on Thursday, and they were not bad. We will see if retail sales can continue to grow.

There was an interesting article in Bloomberg about the benefits of the foreclosure situation. Some people are squatters and just not paying their mortgages. On average, they can stay in their house for a year and a half before they are kicked out. They do not pay any rent and use that money to get their finances in order and will actually consume goods. They say that provides as much as $50B of consumption in the economy by people just not paying their mortgages.

Retail sales will be important on Friday Friday the 13th, mind you. We will get with CPI and Michigan Sentiment. Michigan Sentiment at 69.8. What did I say about sentiment during the Reagan years at this point in the recovery? It was a conference board, but it was at 100. I can guarantee you the conference board here is nowhere near that.

Next week we will be watching to see if the indices can resume that breakout after coming back and testing that move. There are some good stocks that we want to move into if the market does. This has gone to plan. We looked for a breakout, and it made it. We looked for a test, and it has done that. Now we have to see if it will reverse and continue the rally or if it is all done and will take the summer off.

I still like what I see from leadership. It has the horses to pull it, it is just a matter of whether or not those horses want to drink after being led to water. We will see. Everything is set, but it did not happen on Friday. That was somewhat of a concern given that the trigger was there. Perhaps they are waiting to see what happens on Monday. Also there was the turmoil with the commodities market. We will see what happens with respect to that.

A strengthening dollar will not hurt. It makes the oil cheaper and puts more money in each American’s pocket. That will definitely not hurt our economy.

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com