The Past Week: Uninspiring Jobs Report Causes Downturn!
Worldwide Rate Cuts!
by Ian Harvey
July 09, 2012
The month of July is getting off to a rough start. Worldwide rate cuts last Thursday did not impress investors or traders. This set the stage for June’s uninspiring jobs report, which led to stocks closing the week on a negative note.
The rate cuts got a mixed reaction from investment professionals. While some applauded them, others saw them as a sign that the economic recovery is in worse shape than central bankers are admitting.
The jobs report on Friday made no one happy because it clearly showed the domestic economy has slowed down.
The Dow and the S&P 500 posted weekly losses, while the Nasdaq managed to eke out a gain for the fifth-consecutive week.
The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 17.
• The Dow Jones Industrial Average (DJIA) was down 0.84 percent, to 12,772, after a 124-point drop Friday on June’s weak employment report
BofA (BAC) was the biggest laggard on the Dow for the week, while Wal-Mart (WMT) gained.
• The Standard & Poor's 500 Index (SPX) finished the week at 1354, off 0.55 percent.
Despite a choppy second quarter, the S&P is still up 7.7 percent year to date.
• The Nasdaq Composite Index (COMP) had a gain of 0.08 percent at 2937 for the week.
The August crude-oil contract rallied sharply from its lows at $77.28 last week, hitting a high of $88.98 on Thursday. This was still below the major 38.2% retracement resistance from the March high, which stands at $90.34.
It will be interesting to see if we get a soft test of the June lows, with first support now in the $80 to $82 area.
The SPDR Gold Trust (GLD) was hit hard Friday after slightly breaking its short-term downtrend (line b). As mentioned last week, the technical action has improved over the past week, and there is a strong seasonal pattern for gold to bottom in July.
This makes the current decline quite important. If we get a decisive break below the late June low at $150.15, it will suggest one more drop before the lows are in place. The sentiment on gold is already quite negative, and has reached levels consistent with a bottom.
The yield on the ten-year T-Note turned lower on Friday, after having risen from a low of 1.44% on June 1 to a recent high of 1.67%. The chart points towards still lower yields as the completion of the flag formation (lines a and b) still has downside targets in the 1.35% area. In short, from a technical standpoint, there are no signs yet that rates have bottomed.
Economic News in the Past Week
The economic news was mixed last week, though things started on a sour note. The ISM Manufacturing Index last Monday contracted for the first time since July 2009. Export orders were a serious negative, and the PMI Manufacturing Index on Monday also reflected the weakest rate of growth in 18 months.
Factory Orders the next day were better than expected, and the ISM Non-Manufacturing Index last Thursday still reflected a decent rate of growth, though it was lower than May’s reading.
The Jobs Report
Non-farm payrolls rose by 80,000, according to the Labor Department, missing expectations for a gain of 90,000 jobs, according to a Reuter’s poll. Meanwhile, the unemployment rate remained unchanged from May at 8.2, in line with predictions.
With yet another month of weak employment growth, the second quarter marks the weakest three-month period in two years, fueling optimism that the Federal Reserve will step in with additional monetary easing.
Sentiment in the Past Week
Both the individual investor and the financial newsletter writers became more bullish last week, but the worse than expected jobs numbers could alter their enthusiasm. If you take this as a bullish view, then the current correction should be a good buying opportunity.
The Major ETFs in the Past Week
End of the week selling has taken the major ETFs off the weekly highs. The shortened trading week started out bullish for stocks as some minor resistance levels were broken, indicating a further rise in stocks. On July 6 though, that buying came to a halt, and selling eroded or completely erased all gains seen during the week.
The past week’s selloff should be taken with a grain of salt because it’s a holiday week so some of the moves are magnified!
However, the health of the economic recovery is difficult to predict at this point, as there are no clear signs like there were in 2007 and 2008. That time around, the technical outlook turned negative well ahead of the fundamentals, and it remained negative until March 2009.