The Past Week: Jobs News Drives Markets To New All-Time Highs!
Stock Market: S&P Breaks 1600, Dow Touches 15000 On Jobs Report!
Wall Street: Friday Was An Historic Day!
by Ian Harvey
May 06, 2013
The S&P 500 Friday, of the past week, vaulted above the psychological 1600 level for the first time, after April's better-than-expected jobs report. The Dow broke through the major milestone of 15,000 for the first time though it closed below it. At the same time, bond yields that were testing the lows of the year just Thursday, jumped, taking the 10-year yield to 1.74 percent.
Investors cheered the jobs report on Friday of the past week, which showed employment rose at a faster than anticipated pace in April, and hiring in the prior two months was much stronger than previously thought.
The report eased investor concerns after a raft of soft data, particularly in the manufacturing sector, and sent the S&P 500 hurtling past what was viewed as its final resistance level of 1,600 to a fresh all-time closing high of 1,614.42.
The Russell 2000 index of mid-cap and small cap companies also hit a record in the past week, which pros consider a confirmation of the broadness of the rally. About three-fourths of stocks traded on both the New York Stock Exchange and the Nasdaq were in positive territory. Things did not look nearly as good in the middle of the past week. The ADP jobs report, ISM Manufacturing Report, and the FOMC announcement spooked the markets. The decline on Wednesday caused two important markets, the Dow Transports and Russell 2000, to reverse from important resistance, which had negative technical implications.
Frequently an interim top is confirmed by a sharply lower weekly close. And this looked like a possibility after Wednesday's close.
But the sentiment on Thursday was totally different. After jobless claims dropped to the lowest level in five years, the ECB cut rates and hinted that they were willing to take further action.
The chart from The Wall Street Journal from the past week, shows that the ECB's Mario Draghi really had little choice. The unemployment rate has continued to soar, and is now over 12%. The inflation rate, on the other hand, has dropped sharply, and can no longer be used as an excuse not to cut rates.
Needless to say, stocks reversed to the upside Thursday, then moved even higher in reaction to the much stronger jobs report on Friday. All of the major averages closed with nice gains in the past week. The trading range in the Russell 2000 was completed with a 2.2% gain, suggesting that stocks can still move significantly higher.
NOTE: 506% PROFIT SO FAR THIS YEAR!
• The Dow Jones Industrial Average (DJI) jumped 1.78 percent, to close at 14,973.96 for the past week.
Microsoft was the biggest gainer on the Dow for the quarter, and Merck was the worst weekly performer.
In intraday trading, Friday of the past week, the Dow crossed the 15,000 level for the first time on record, and tagged a new all-time high of 15,009.59.
• The Standard & Poor's 500 Index (SPX) advanced 2.03 percent, to finish at 1,614.42 for the past week.
Among the key S&P sectors, utilities was the worst performer for the past week, while techs gained.
With the gains on Friday, the S&P 500 put together its first consecutive weekly advances since a seven-week run that ended in mid-March, a possible sign of a further move higher. Markets now head into the traditionally weaker summer months. The index has fallen in May for the past three years.
• And the Nasdaq Composite Index (COMP) surged 3.03 percent, to finish Friday of the past week at 3,378.63.
The COMP rallied to a 12-year high.
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, moved further into the red on Friday, dropping 0.7 point, or 5.5%, to end the day at 12.85, its first close below 13 since April 12.
The VIX lost 5.4% on the past week.
World Markets for the Past Week
The better jobs data comes just a month after the Bank of Japan promised to inject about $1.4 trillion into the Japanese economy to spur growth and end decades of deflation.
By increasing liquidity, three of the world's major central banks have fueled a rally in share and bond markets that has driven many benchmark indexes back up to levels last seen before the financial crisis began.
Sector Focus for the Past Week
The iShares Dow Jones Transportation (IYT) tested its downtrend (line c) on Tuesday before it dropped sharply Wednesday.
The close on Friday was well above the prior high of $110.50, as the continuation pattern (lines c and e) appears to have been completed. There is next resistance at the all-time high of $112.30.
The daily On-balance volume (OBV) broke through its resistance (line f) at the end of April, and now shows a positive zig-zag formation. The weekly OBV (not shown) has turned up from its rising WMA, so the multiple time frame OBV analysis is positive.
All of the sectors ETFs were higher in the past week except for the Select Sector SPDR Utilities (XLU), which was down a fraction.
As the table below indicates, the Select Sector SPDR Technology (XLK) did the best, up around 3.9%, followed by the Select Sector SPDR Energy (XLE), which gained 3%.
From a technical perspective, the Select Sector SPDR Materials (XLB) is now just testing the twin peaks from January and March, so an upside breakout would be important.
Neither the Select Sector SPDR Health Care (XLV) nor the Select Sector SPDR Consumer Staples (XLP) made new highs for the year, but both closed up.
Earnings Reports for the Past Week
The bulk of the earnings season is now behind us, with results from 405 S&P 500 companies already out as of Friday, May 3rd. The Retail sector is the only one where more than half of the sector’s total market capitalization has yet to report Q1 results.
For the remaining sectors, the reporting season has ended for 3 – Autos, Construction and Aerospace.
By continuing to grade the Q1 earnings season as between ‘average’ and ‘below average’ – it’s definitely neither ‘good’ nor ‘bad.’ This isn’t materially different from what we have been seeing over the last few earnings seasons. What this means is that about two-thirds of the companies beat earnings expectations, but growth is essentially non-existent. A key difference relative to 2012 Q4 earnings season is the very low level of positive revenue surprises.
Here is the summary scorecard for the 405 S&P 500 companies that have reported Q1 results, as of Friday May 3, 2013:
The chart shows that while there has been a nice growth in earnings, the revenues have been falling. This reflects the results from 272 members of the S&P 500, and at the beginning of April they were looking for just a 0.5% gain versus a year ago. They were also off on the revenue side, as they were looking for a gain of 4 - not the current 1.4% reading.
Crude oil also had a wild week. After dropping sharply on Tuesday and Wednesday, it also reversed to the upside and closed above the prior week's high. It was up $2.70 per barrel for the week. The weekly OBV has turned up, and is trying to close back above its WMA.
The weekly OBV continues to look weak, as it has since earlier in the year. It has formed a pattern of lower lows (line a).
The recent decline in yields from the January highs is an indication that many still do not trust stocks, so they are flocking to the safety of bonds. But how much lower can yields go? If the economy continues to get better as the numbers suggest, rates will inevitably move higher as the Fed's targets are reached.
For those holding 30-year bonds, a 1% rise in rates translates to a 20% drop in the bond price. For those in ten-year T-Notes, a 1% rise would mean a 9% drop in the T-Note's price.
The 30-year-plus bond bull market is reflected by this long-term chart of T-Bond yields by year-they have declined from 15.2% to 2.91%! But this can't last forever.
The rally in yields from last summer's lows may be the first part of the bottoming process, but clearly there are no signs yet that yields have bottomed or bonds have topped.
Economic Reports in the Past Week
U.S. employers added 165,000 jobs in April, according to the Labor Department, while the unemployment rate fell to a four-year low of 7.5 percent. Economists in a Reuters poll expected a reading of 145,000 and unemployment to hold steady at 7.6 percent. Non-farm payrolls came in at a disappointing 88,000 in March.
However, other economic reports were not as encouraging. The rate of growth in the U.S. services sector slowed in April, according to the Institute for Supply Management, hitting its weakest pace in nine months. And factory orders posted their biggest decline in seven months, according to the Commerce Department.
But Wall Street largely shrugged off both weaker-than-expected data.
• Personal Income and Spending
Both personal income and spending rose 0.2 percent for the month of March. This compared to consensus estimates that called for income to increase by 0.3 percent and spending to rise 0.1 percent. The personal savings rate remained steady at 2.7 percent, well below the 3.5 percent it averaged for most of 2012.
• S&P Case-Shiller Housing Price Index The pace of home price increases continued to accelerate in February, according to a reading Tuesday that showed the biggest gain since near the height of the housing bubble.
The S&P Case-Shiller index of home prices in 20 major markets posted a 9.3% rise over the last 12 months. That's up from the 8.1% rise in January. It was the biggest 12-month gain in the index since May 2006, which was just one month after the index showed record-high home prices.
This chart of year-over-year change in the S&P Case-Shiller housing price index looks very bullish. It shows an uptrend from the 2009 lows (line b), and then a breakout above resistance (line a).
• Chicago PMI
Manufacturing in the Chicago region contracted in April for the first time since September 2009. Chicago PMI fell from 52.4 in March to 49.0 in April. The consensus expected a decline to 52.0.
• Consumer Confidence
Consumer confidence jumped sharply in April. The Conference Board's index jumped from 59.7 in March to 68.1 for April. This was well above the consensus estimate which called for an increase to 61.0.
• ISM Index
The ISM Manufacturing fell 50.7 for the month of April compared to 51.3 in March. This compared to consensus expectations of a decline to 51.0.
• ADP Employment Change The ADP Employment report fell sharply for April to 119,000 jobs compared to 131,000 in March. This was also well below consensus expectations which expected a rise to 155,000.
• Jobless Claims
Initial jobless claims fell from 342,000 for the week ending April 20 to 324,000 for the week ending April 27. This was the lowest reading since January 2008 and fell well below consensus estimates calling for an increase to 346,000.
The continuing claims level rose to 3.019 million for the week ending April 20 from 3.007 million for the week ending April 13. This compared to consensus estimates calling for an increase to 3.050 million.
• Nonfarm Payrolls
Nonfarm payrolls for the month of April increased by 165,000 which was 10,000 above consensus expectations of 155,000.
Private payrolls rose by 176,000 versus consensus estimates of 166,000. In March, private payrolls rose by 154,000.
• Unemployment Rate
The unemployment rate ticked down as a result of job growth in April. The figure for last month was 7.5 percent compared to 7.6 percent in March. The consensus expected unemployment to remain unchanged.
• Factory Orders
Factory orders declined by 4 percent for March versus a 1.9 percent increase in February. This was worse than consensus expectations, which expected factory orders to fall by 2.5 percent.
• ISM Services
The ISM non-manufacturing Index fell from 54.4 in March to 53.1 in April. This was above consensus estimates, which called for the Index to fall to 54.0.
NOTE: 506% PROFIT SO FAR THIS YEAR FOR OPTIONS TRADES!
Conclusion for the Past Week
As mentioned above, U.S. employers added 165,000 jobs in April, according to the Labor Department, while the unemployment rate fell to a four-year low of 7.5 percent. Economists expected a reading of 145,000 and unemployment to hold steady at 7.6 percent. Non-farm payrolls came in at a disappointing 88,000 in March.
But the unemployment rate remained well above the 6.5 percent level at which the central bank has said it will start raising interest rates. On Wednesday, the Fed said it was prepared to "increase or reduce" the monthly pace of its $85 billion in bond purchases, depending on economic conditions.
"The [jobs] number beat consensus and also importantly, the revision from last month tell the story of a not-as-sluggish labor market. However, the unemployment rate is still high. So that tells us that the Fed is going to continue with its accommodative policy–that means the market has Fed support, which is good for asset prices and a jobs market which is not getting worse.
Adding to that, earlier this past week, we saw that housing price levels have actually gone up -- so, with the U.S. real estate market bottoming in 2012, we're clearly on an upward trend in 2013.
And global markets cheered the employment report, with European shares turning decisively higher and the dollar jumping against the euro and the yen. Oil prices rallied, while gold, often viewed as a safe haven, slid near $1,460 an ounce. Treasury prices also declined.
The economy is better than many expected, and it should continue a bit here—ignoring the 'sell in May' argument— which, looking at the past week’s action, is a valid point. The rotation has a bit more legs -- since the beginning of the past week, the market was led higher by tech, energy, and materials, all sectors that lost ground from mid-March to mid- April. Those sectors were among the leaders in Friday's rally.