Bulls In Charge Still!

The Bulls In Charge – Moving Forward!

Market Direction: Economy Is The Key!

by Ian Harvey

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April 08, 2013

Introduction

So far this year, all three major U.S. indexes have already logged double-digit percentage gains. And it's only April.

While investors are optimistic about stocks, they're much more pessimistic about the economy.

The recent soft economic data echoes the pattern of a strong winter and a weak spring of recent years, but analysts don't expect either the weak economic data or subsequent hesitant stock market to last.

Economists expect the second quarter to be weaker than the first, but expect a rebound in the third quarter and beyond. At the same time, stock strategists have also been looking for a pullback so traders are talking about the coincidence of a weaker market and weaker economy coming together.


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Resilience of the Bulls

Despite the unexpected jobs news Friday morning, the market actually showed quite a bit of resilience and finished well off its lows. As you might imagine, markets sold off sharply on the jobs news. However, stocks recovered very well, and in addition, we saw leadership from small-caps, which were encouraging which shows that the bulls can hang-in-there in the worst of times!

Jobs Report

The U.S. economy created 88,000 new jobs in March, far short of the expected 200,000 positions Wall Street had expected. The U.S. Labor Department also reported that the unemployment rate fell to 7.6 percent.

This terrible jobs report only took the stock market down 2.5 percent from all-time highs, and a pullback in stocks had been widely expected anyway.

As of Thursday, the stock market was down 1 percent off their highs – with Friday, the Standard & Poor's 500 Index (SPX) was down another half percent by close of trading, so a total of approximately 1.5 percent off on all-time highs in the S&P – a slight pullback – not panic material!

One particularly interesting thing that occurred Friday was the weird inter-market relationships between bonds, stocks, and metals -- all rallying in unison. Bonds were up sharply, higher by nearly 2.4% on the day; while gold and silver were each up about 1.5%.

If U.S. economic data doesn't seriously disappoint any further, investors might have to give up on the idea a correction is inevitable.

The data needs to weaken a great deal more – otherwise, the idea that there's a deeper pullback coming may not occur -- and leaves the bulls in charge still!


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Slowing Momentum

There appears to be a slowing of momentum toward the upside, keeping the S&P 500 in the 1,540-1,560 range – due to the possibility that the market could see "a seasonally soft period of economic data," as well as geopolitical events that might spook investors – providing some degree of caution.

Looking at the CBOE Market Volatility Index (VIX) ), during the sell-off periods, saw it approach, but didn't break through, the 200-day moving average.

Conclusion

Given how well markets reacted to the abysmal jobs report, I believe that the bulls are still in control of the market. One popular trading mantra is that it’s all about expectations, and the reaction in markets is more important than the data itself.


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Friday’s bounce looks like it’s one of those “it doesn’t matter” days. However, it would be reassuring to see the S&P 500 retake and hold 1550 – this would be definite proof that shows the bulls in charge still.


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