The Stock Market Ended Week Higher, Despite Jobs Report
The Past Week: Central Bank Intervention Keeps Stocks Rallying!
by Ian Harvey
September 08, 2012
The expectations for central bank intervention, both from the Fed and the European Central Bank, had fueled a stock market rally that took the S&P 500 to its highest level since January 2008 on Thursday and pushed the Nasdaq to a 12-year high.
The gains were fueled by the ECB's decision to launch a potentially unlimited bond-buying program to lower struggling euro zone countries' borrowing costs.
There appears to be plenty of demand for stock, particularly after the ECB announcement, and then a very weak jobs report, but the stock market manages to follow-through! Leading stocks continued to make new highs. The banks were up three days in a row, showing power.
The stock market held steady at four-year highs on Friday, closing out their best week since June as a sharply disappointing jobs report only fueled expectations that the Federal Reserve would act to stimulate the economy in the week ahead.
The S&P closed higher but strength in both the Dow and Nasdaq was limited by blue-chips Intel and Kraft, both of which warned on their profit outlooks.
The August nonfarm payrolls report showed job growth of only 96,000, well under the 125,000 expected. That added to hopes the Federal Reserve will announce additional stimulus after its policy meeting ends Thursday, but investors could be in a holding pattern until then.
Thanks to Thursday's big stock market rally, the week was a winner after two weeks of small declines.
• The Dow Jones Industrial Average (DJI) was up 1.7 percent to 13,306, the highest level since Dec. 28, 2007. For the year, the Dow has gained 8.9%
• The Standard & Poor's 500 Index (SPX) was up 2.2 percent for the week to 1437, the highest level since January, 2008. For the year, the S&P 500 has added 14.3%.
• The Nasdaq Composite Index (COMP) rose 2.3 percent to 3136, its best level since November, 2000. For the year, the Nasdaq was up 20.4%.
The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the stock market, continued its recent downtrend, slipping 1.2 points on Friday, or 7.8%, and landing at its lowest point since Aug. 21. The stock market's fear gauge buckled 17.7% for the week.
TOP OPTIONS TRADES SINCE JULY 01, 2012
|DLTR Aug 110 Calls||32%||UIS Oct 17 Calls||79%|
|HSY Aug 70 Calls||56%||TSO Nov 25 Calls||54%|
|NKE Oct 92.50 Calls||49%||HLF July 47.50 Calls (again)||38%|
|FB Aug 25.00 Puts||500%||DISH Sept 30.00 Calls||100%|
|APPL Jan 13 650.00 Calls||71%||CSTR Oct 42.50 Puts||400%|
|LNKD Aug 92.50 Puts||30%||LNKD Aug 100.00 Calls||250%|
|SLV Nov 30.00 Calls||114%||JCP Nov 25.00 Calls||67%|
|GLD Nov 165.00 Calls||72%|
The asset class analysis shows that the Spyder Trust (SPY) is now up almost 15% on the year, which is a dramatic improvement from the June lows. Gold had a good past week and is now up close to 11% for the year as it remained unchanged for much of June and July.
There are two areas on the chart that have been highlighted which look quite interesting from an asset allocation perspective. The first occurred in July when the performance of the SPY moved well above the performance of iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT), which represents the bond market. This coincided closely with the peak gain of 9% for TLT. Since then the SPY has gained about 6%.
The other point occurred in mid-August when the performance of the TLT dropped below that of SPDR Gold Trust (GLD). Since then GLD has gained almost 9%. Some analysts are looking for a confirmed top in the bond market before they will turn more bullish on stocks. Rates did turn higher in the past week but it will take another week or so before a top can be confirmed.
The November crude oil contract closed higher Friday but was flat for the past week. Prices are still locked in a trading range as it has not broken out to the upside like the stock market. They often have a close correlation so crude oil will bear close watching in the week ahead.
A close above the $98.60 level would be an upside breakout and would signal a move to the $100-$102 area. On the downside a close below the $94 level would be a short-term negative.
Light sweet crude oil in New York finished up 89 cents to $96.42 a barrel in the past week. Brent crude, a big determinant of gasoline prices, was up 83 cents to $114.32 a barrel. For the week, light sweet crude was off slightly. Brent is off 0.2%.
”Brent Crude”, or more accurately known as 'North Sea Brent Crude', is a type of oil that is sourced from the North Sea. This type of oil is used as a benchmark to price European, African and Middle Eastern oil that is exported to the West.
North Sea Brent Crude was discovered in the early 1960s. It is now sourced primarily by the United Kingdom, Norway, Denmark, the Netherlands and Germany. Brent crude oil is not as light or as sweet as its counterpart, West Texas Intermediate oil.
The national average price of gasoline was down slightly Friday in the past week, to $3.822 a gallon from Thursday's $3.823, according to AAA's Daily Fuel Gauge report. The price is up 16.7% for the year and up 14.9% since July 2.
The SPDR Gold Trust (GLD) was up well over $4 in the past week and has closed above the 50% 'Fibonacci Retracement’ resistance at $167.07.
Even though the bullish sentiment has picked up on gold, the GLD may not see a significant pullback until the resistance at $174 is tested. For the iShares Gold Trust (IAU) the next major resistance is in the $17.40-$17.60 area.
The iShares Silver Trust (SLV) has also completed its triangle pattern (lines a and b) suggesting that it also has completed its correction. The major 38.2% Fibonacci retracement resistance is at $34.11 with the 50% resistance at $36.83. The weekly OBV has broken its downtrend but is acting much weaker than the volume in gold. There is initial support now at $29.50-$30.50 with the rising 20 week ’Exponential Moving Average’ (EMA) at $28.80. SLV is likely to see a meaningful correction over the next month or so where we should get a better risk entry point.
Gold settled up $34.50 to $1,740.50 an ounce on Friday due to Fed speculation and on hopes that the European bond-buying program envisioned by the European Central Bank will work. The settlement price was the highest since $1,788.40 on Feb. 28. Gold was up 3.1% for the week and is up 11.1% for the year.
Silver rose 7.2% for the week, to settle at $33.69 an ounce, and is up 20.7% for the year.
Copper added 12.9 cents to $3.645 a pound o Friday, and climbed 5.4% for the week and is up 6.1% for the year.
Company News and Earnings for the Stock Market in the Past Week
• Intel Corp (INTC) cut its third-quarter revenue estimate and withdrew its full-year forecast, saying demand for its chips declined as customers reduced inventory and businesses bought fewer personal computers. Shares of the world's largest chipmaker fell 3.6 percent to $24.19 while the PHLX semiconductor index .SOX lost 0.8 percent.
• Kraft Foods Inc (KFT) gave earnings forecasts for the two companies it will split into next month that disappointed analysts. The stock, which like Intel is a Dow component, fell 5.5 percent to $39.99.
• Google (GOOG) moved over $700 for the first time since Dec. 28, 2007, rising $6.75 to $706.15. It was within 5% of its all-time closing high of $741.79, set on Nov. 6, 2007.
Economic News for the Stock Market in the Past Week
In the past week, the data was mixed with improvement in jobless claims and the ISM nonmanufacturing survey (a gauge of the services sector), but weakness in the ISM manufacturing survey and the employment report.
The economy added 96,000 jobs in August; economists had hoped for 130,000 or so new jobs. The unemployment rate dropped to 8.1%, but many would-be job seekers have stopped looking.
The jobs report stalled the big rally cold. It reflects tepid economic growth at best. Private-sector job growth was just 103,000, the report said, and government employment dropped 7,000. That decline reflects falling employment in public higher education and local schools.
June and July job gains were trimmed by 41,000.
The labor-force participation rate fell to 63.5, the lowest rate since September 1981, when the economy was in the throes of a difficult recession.
The manufacturing sector, a closely watched barometer for the broader economy, lost 15,000 jobs.
Residential construction employment lost 1,100 jobs to 563,800, the Labor Department said. Employment in the sector has barely budged since bottoming at 560,700 jobs in November 2010. Put another way, 461,300 residential construction jobs were lost between April 2006 and November 2010. Only 3,100 jobs have been added since then.
Sectors that did show growth in employment tended to be lower-paying ones -- about 40% of the new jobs came from four sectors: retail, leisure and hospitality, temporary help services, and home health care services.
The disappointment raised expectations that the Federal Reserve will decide in the week ahead to start a new round of stimulus, although a Fed move is not a given. The report won't help President Obama in his re-election campaign.
The NYSE Composite in the Past Week
The daily chart of the NYSE Composite shows that May 1st highs were exceeded on Friday of the past week, with next resistance at 8327. Once this level is overcome, the next major resistance is in the 8670 area. There is good support now in the 8000-8050 area.
The NYSE Composite advance/decline (A/D) line made significant new rally highs in the past week, as the advancing stocks led the decliners by a 4 to 1 margin. This may be signaling the start of a period similar to what we witnessed in early 2012 when the A/D line was in a steep uptrend (in blue).
Sentiment in the Past Week
There has clearly been some improvement in the technical picture as discussed above. However, the sentiment picture has gotten more negative as 51% of the newsletter writers are now bullish. The danger zone is typically in the 55-60% area. The individual investor is much less bullish at 33% according to AAII survey of individual investors.
The Major ETFs in the Past Week
Stocks jumped up this past week, especially on September 6 when the indexes climbed near 2%. For some of the major index Exchange-Traded Funds (ETFs), that was enough to push them just above resistance levels. However, other index ETFs remained below resistance, but was close to it. As mentioned in prior weeks, this is a pivotal area for stocks. How the stock market reacts in this area is likely to dictate the next major move that's to occur, and whether it is to the upside or downside.
1. The Economy and Earnings in the Week Ahead – September 10, 2012
2. The Week Ahead in the Stock Market – September 10, 2012
3. The Major ETFs in the Week Ahead – September 10, 2012