The Past Week in the Stock Market
June 10, 2013

The Past Week: The Stock Market Overcomes Weakness To End The Week In The Black!

Stock Market: Jobs Number 'Just Right' For Nervous Investors!

Wall Street: Jobs Report Contributes To A Strong Close For The Market After A Volatile Week!

by Ian Harvey

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June 10, 2013

Introduction

All of the major indexes picked up ground this past week, erasing earlier losses. Stocks rebounded late in the week, but only after the averages broke a few levels of support that many thought would hold.

The Dow Jones industrial average and Standard & Poor’s 500-stock index surged more than 1 percent Friday, and it appears that the bull market in stocks is still intact heading into the week ahead.


It was the biggest two-day gain, 2.1 percent, during the past week, since January for the S&P.

The jobs data also helped boost the dollar against a basket of foreign currencies, and Treasury prices declined, indicating that there was not as much demand for the safe haven.

Friday's gains helped push the major indexes into positive territory for the week, following two straight weeks in the red. The Dow and S&P 500 are about 2% from the record highs they hit last month.

European markets followed U.S. stocks and closed sharply higher.

The S&P 500 and the Nasdaq posted their best daily percentage gains since April 16.


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The Fed Influence in the Past Week!

Stocks have rallied for most of the year. But the market began to lose ground following Fed Chairman Ben Bernanke's comments on May 22 that the central bank may decide to ease back on its bond-buying programs in the next few policy meetings if data shows the economy is showing improvement. The Friday before the past week, saw the S&P 500 mark two consecutive weeks of losses for the first time this year.

The market earlier this past week traded off precipitously, believing the Fed was close to stopping. The job numbers made it pretty clear that the Fed can't stop or even start tapering in September like they'd like to, so ironically the stock market went up.

The Labor Department's data showed job gains of 175,000 in May, slightly above the economists' forecast, while the U.S. unemployment rate increased to 7.6 percent last month from 7.5 percent in April.

Volatility in the Past Week

But stocks have been volatile recently, as investors grapple with concerns about when the Federal Reserve might start to cut back on its stimulus efforts.

The U.S. job market has remained one of the economy's weakest areas since the recent downturn. The Fed, in turn, has linked its monetary policy to improvement in the country's job market. Economists say job gains of at least 200,000 per month over several months are needed to significantly reduce high unemployment.

The market's recent volatility suggests investors are starting to price in the eventual end of Fed stimulus, analysts said, raising concerns about how well stocks will fare without it.

The stock market's rally this year has largely been driven by the Fed's continued bond purchases. The VIX index, which is considered a good proxy for market uncertainty, reached a three month intra-trade high on Thursday, but declined 7.5 percent on Friday after the jobs report. It had been steadily rising since early May.

There was even more volatility in the foreign exchange market. JPMorgan Chase’s G-7 Volatility Index has reached its highest level since June 2012.

Investors have overreacted to hints that the Fed would taper its bond purchases sooner than expected — as early as this summer – it appears that investors were looking for any excuse for profit-taking after stocks advanced sharply in May.

By historical standards, the market volatility has been lower than normal -- the S&P has declined more than 2 percent an average of 15 days a year since 2000 -- but it has only dipped that much one day this year and three days last year.

• The Dow Jones Industrial Average (DJI) climbed 0.9 percent in the past week, to close at 15,248.12.

• The Standard & Poor's 500 Index (SPX), widely used by mutual funds as a proxy for the stock market, rose 0.8 percent in the past week, to finish at 1,643.38.

• And the Nasdaq Composite Index (COMP) added 0.4 percent in the past week, to end at 3,469.22.

• The CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, dipped south of the 15 level intraday, but closed at 15.14 after losing 1.5 points, or 9%.

This past week, the VIX went on a wild ride, ultimately closing off 7.1%.

Overall, the Dow is up 16.4 percent for 2013, while the S&P 500 is up 15.2 percent and the Nasdaq is up 14.9 percent.

World Markets

Dollar/yen was down nearly three percent this past week, but saw huge, swift intraday swings as investors reacted negatively to Prime Minister Shinzo Abe's economic stimulus program, and as markets recalibrated around the important May jobs report Friday. The move ricocheted through global markets as big macro trades were unwound. The Nikkei continued its rapid decline, entering bear market territory temporarily Friday morning, and just weeks after a rocket run higher, on the back of BOJ easing.

The huge reversal in the Japanese markets over the past two weeks has certainly gotten the world's attention. The Nikkei-225 futures were up over 47% for the year on May 22, but by Thursday's close had corrected to just +16%.

This has corresponded with weakness in the yen. Yen futures had dropped over 16% before rebounding, but are now only down 11% for the year.

Japan ETFs have been hit hard; the iShares MSCI Japan Index Fund (EWJ) has retraced over 50% of its rally from the 2012 lows. This is also the case for the Wisdom Tree Japan Hedged Equity (DXJ), which peaked at $53.50 and hit a low last week of $42.

The latter is the favored play for investing in Japan...and that this is just probably a correction. Expect the Nikkei-225 to resume its uptrend and the yen to fall considerably more over the intermediate term.

The reversal in the Japanese markets and the correction in other global markets were based in part on fears that the Fed would stop its accommodative policy as rates have moved higher.

The Bond Market in the Past Week

Last week, it was noted that T-Bond yields had completed a reverse H&S bottom formation, which projects even higher yields, but that does not require a change in Fed policy. This has put additional pressure on bondholders, who get more worried as there are signs of economic improvement.

As the chart shows, the total return from investment-grade corporate bonds has dropped from 2% in early May to -1% now. With yields expected to move even higher, bond prices have further to fall, and will reach a point where stocks will look even more attractive.

Sector Focus

The iShares Dow Jones Transportation (IYT) closed the week up almost 1%.

The table below shows not only the percentage change for the past week, but the past two weeks. It shows that the Select Sector SPDR Utilities (XLU) and Select Sector SPDR Consumer Staples (XLP) were the weakest, down 2.1% and 3.2% respectively over the past two weeks.

Meanwhile, the Select Sector SPDR Technology (XLK) was up slightly last week and flat for the past two weeks. The Select Sector SPDR Financials (XLF) was up 1.2%. The Select Sector SPDR Industrials (XLI) and the iShares Russell 2000 Index (IWM) were the only other higher closes over the past two weeks.

The daily chart of the Select Sector SPDR Financials (XLF) shows what may be just a short-term corrective pattern, as XLF bounced from the lows at $19.22 and the daily Starc band.

The daily relative performance has turned up from its WMA and shows a pattern of higher highs. The on-balance volume (OBV) has also held up well, and is fairly close to making new highs. The weekly RS and OBV analysis are also strong, closing the week at new highs. The weekly Starc+ band is now at $20.73.


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Crude Oil

Crude oil closed the week strong, as it was up over $4 per barrel and volume increased nicely. Next resistance, basis the August contract, is at $97.38 to $98.22. The weekly OBV has also turned up once more.

Precious Metals

The gold futures were hit hard on Friday, and it looks like another wave of selling is underway. A break below the recent lows (line d) of $130.66 in the SPDR Gold Trust (GLD) would be quite negative. The daily OBV shows no signs yet of bottoming.

The Jobs Report and the Fed in the Past Week

The U.S. added 175,000 jobs in May, according to the Labor Department, indicating the economy was expanding modestly, but not enough to convince the Federal Reserve to pare back its bond-buying program. The unemployment rate edged up to 7.6 percent. Economists surveyed by Reuters expected a gain of 170,000 jobs with the rate holding steady at 7.5 percent.

Employment is a key indicator for the Federal Reserve, and Chairman Ben Bernanke has indicated the central bank could start tapering off its $85 billion bond purchases if the jobs market shows consistent improvement. Other Fed officials have also stated that they are prepared to consider downsizing the asset purchase program.

Meanwhile, former Federal Reserve Chairman Alan Greenspan, said that the central bank should start to taper its $85 billion a month bond-buying program even if the economy is not ready for it, saying that the near-zero interest rate policy has helped stock prices, but the markets need to be prepared for faster-than-expected rise in rates.


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Monday

ISM Index

The ISM Manufacturing Index fell to 49.0 in the month of May compared to a reading of 50.7 in April. This was the first contraction in ISM since November 2012 and the lowest reading since June 2009. The consensus expected that the index would rise to 50.9. • Construction Spending

For April, construction spending rose 0.4 percent compared to a decline of 0.8 percent for March. The consensus had expected an increase of 1.1 percent for April.

Wednesday

ADP Employment Change

According to the ADP Employment report, the economy added 135,000 jobs in May. This compared to 113,000 in the prior month and consensus expectations calling for a rise of 157,000.

Factory Orders

Factory orders rose 1.0 percent in April after declining 4.7 percent in March. This compared to consensus expectations calling for an increase of 1.6 percent.

ISM Services

Although the manufacturing industry contracted in May, the services sector continued its expansion. The ISM Non-manufacturing Index rose to 53.7 in May compared to 53.1 in April. This came in slightly above consensus expectations calling for a rise to 53.5.

Thursday

Jobless Claims

Initial jobless claims fell to 346,000 for the week ending June 1 from 357,000 for the week ending May 25. This compared to consensus estimates calling for initial claims to fall to 348,000.

Continuing claims declined to 2.952 million for the week ending May 25 compared to 3.004 million for the week ending May 18. The consensus expected continuing claims to fall to 2.980 million.

Friday

Non-farm Payrolls

Non-farm payrolls rose by 175,000 jobs in May compared to 149,000 new jobs added in April. This came in above consensus estimates calling for 159,000 new jobs to be added in May.

Private payrolls climbed by 178,000 last month compared to 157,000 in April. The consensus expected that 175,000 new private jobs would be added in May.

Unemployment Rate

Unemployment rose slightly in May to 7.6 percent compared to 7.5 percent in April. This was above consensus expectations which called for the unemployment rate to remain flat at 7.5 percent.

Average Workweek and Earnings

The average workweek remained flat versus April at 34.5 hours.

Hourly earnings were flat in the month of May. This compared to expectations of a 0.2 percent rise.

Consumer Credit

Consumer credit increased by $11.1 billion in April. This compared to a rise of $8.4 billion in March, but was below consensus estimates calling for consumer credit to increase by $13.2 billion in April.

Conclusion for the Past Week

The force of the rally probably surprised short sellers in the past week, particularly those who had bet the market was heading lower and were forced to cover their positions. They may get another chance to short the market, maybe even in the week ahead.

The major averages hit intraday highs on May 22 and have fallen back since: 1.9% for the Dow, 2.6% for the S&P 500 and 1.8% for the Nasdaq – does this mean that the market is vulnerable?

If the averages peak -- but not at new highs -- and fall back, that will concern technicians. They will see a head-and-shoulder pattern forming, very often a signal of a weakening market.

They also are watching to see if the Hindenburg-Omen -- a combination of more than 2.2% of New York Stock Exchange Stocks hitting new highs and 2.2% hitting new lows on the same day -- will force the market down. This happened four times between May 29 and June, according to the”McClellan Oscillator” data.

That the averages have gained so much this year -- 16.4% for the Dow, 15.2% for the S&P 500 and 14.9% for the Nasdaq -- remains a concern. It just gets harder to move higher. And that's why all those analysts who have seen a correction ahead still believe its coming.

It just needs a trigger to set it off.

The week ahead, however, doesn't really have the potential for a big trigger.

The biggest may be Monday, when Apple's (AAPL) annual developer conference starts. If Apple doesn't make some major product announcements, the stock could be pressured.


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