Jobs were drastically lower than expected. Markets gaped down at the open and bonds soared on the weak economic news. Suddenly the bad news bulls stampeded into the picture and not only pulled the markets back from the brink but pushed them to new highs in many cases. Bad news equals strong markets or so it appears.
Dow Charts - Daily
Nasdaq Chart - Daily
The bad news came in the form of the February Employment Report and a huge miss in the headline number. Only 21,000 jobs were created in February when official estimates were for +125,000 and whisper numbers exceeded +250,000 in several instances. Not only was the headline number bad but the numbers for the prior two months were revised down as well. January dropped from +112,000 to +97,000 and December fell from +16,000 to only +8,000. This was not good news for those looking for signs of a rapidly expanding economy.
It was good news for the bond market where bonds soared to eight month highs as fear of a coming rate hike evaporated. Yields on the ten-year note fell to 3.83% and well off the 4.10% highs for the week. That may not seem like much on the surface but in bond terms it is huge. It was the biggest one day change in rates since last July. In one fell swoop the Fed fund futures erased the chance of a quarter point increase in August where it had been indicated and moved it all the way to March 2005. Obviously this can change should the recovery suddenly catch fire but as of today there are no rates hikes expected this year.
Ten-year Yield Chart - Daily
With the Fed on hold and interest rates falling to eight month lows the business environment suddenly improved significantly. Fears of rising rates from a stronger dollar and the panic Greenspan created this week were suddenly forgotten. No strong dollar here or in the near future. All outward signs show the recovery still in progress but moving at a snails pace. This means the deficit will continue to grow from lack of tax receipts from surging earnings but earnings gains are still on track.
The lack of job creation is actually good for earnings. It means productivity will continue to increase and costs will continue to be low. U.S. employees are expensive with up to 40% of their cost going to benefits. Using existing employees until they are forced to hire due to rising demand will keep earnings strong and companies healthy.
The problem we are left with is the unemployed consumer and those that fear they could become unemployed. Workers in those categories hoard money not spend it. Every dollar takes on a higher value when future income is in doubt. What we are likely to see is further drops in consumer confidence and sentiment numbers. Those numbers will be even further depressed because of the political rhetoric which intensified immediately after the jobs announcement. The candidates wasted no time in blasting Bush about the lack of new jobs, the rising deficit and weakness in the economy. This will continue to be fed to the masses and confidence in the current and future economic conditions will decline.
Overlooked in the greater scheme of things was the six consecutive months of positive job creation. Not a record pace but compared to the -300K to -450K per month of job losses in late 2001 this is a huge improvement. We have been steadily improving albeit at a slow pace since the 9/11 disaster. Also, when evaluating the current economy you always have to compare conditions now to those pre 9/11. Economic conditions, business and travel patterns all changed drastically on that day and it had nothing to do with the administration. We have worked our way out of that black hole and America businesses are stronger for it.
Business is improving. Many companies are posting record profits again once they restructured to the new reality. Lessons were also learned from the bursting of the Internet bubble and the collapse of the Y2K buying cycle. There are a lot of things to be positive about and many traders saw through the jobs fog on Friday morning and went on a shopping spree. Business conditions had suddenly improved with the removal of the rate hike cloud that had tanked stocks earlier in the week. Stocks were on sale and smart investors recognizing a bull market opportunity loaded up. Interest rate sensitive stocks like banks and homebuilders soared with many hitting new highs. Consumer stocks like Maytag, TJX and HSY also rose on the prospect of continued low rates.
Bull market? Absolutely! I have been telling you for weeks that the Russell and the Wilshire, the broadest market indicators, were still in rally mode despite the Dow's lagging performance. We saw the proof again today. The Russell broke prior resistance at 600 and traded to a high of 603.16 and a level not seen since March of 2000. That was only .65 below the March-10th, 2000 closing price of 603.81. This is a new four-year high and a very strong performance in the face of the jobs news. The Wilshire traded up to 11370 and a new post 9/11 high. It closed at 11314 also a post 9/11 closing high. The Wilshire-5000 ended up gaining +141 points for the week despite several external events like the Greenspan speech.
In fact, all the major indexes were up for the week except for the transportation index which lost -9 points on the rising price of oil. Considering all the negative events I think this was a bullish week mainly due to the new high closes on the Russell and the Wilshire.
The Dow struggled all week, actually for the last two weeks and remains locked into a narrow range. The spike to 10650 today was very short lived although it put up a valiant attempt to move higher again in the afternoon. In the end like a swimmer sinking beneath the waves the Dow slid back below 10600 once again. This is very tough resistance for the Dow and it has been the price magnet for two weeks. The Dow did get some good news as the 50dma finally rose to a level where it met the horizontal support at 10550. The morning dip hit that 50dma for the first time since November 24th. Now the real decision process will begin. The Dow MUST hold that 50dma and based on the recent highs it will continue to rise to something in the 10600 range. It must hold this average! This has been support since March 2003 and traders have come to rely on it. It is not an electric fence and it can be penetrated. On three of the last four tests it traded across the average for up to five days before breaking free and streaking to new highs. It never traded below it for the entire day. Eventually this avg will fail. I have been projecting an April failure since November. We are now at the crossroads for this market. If the average fails now we could easily see a drop to the 100dma currently at 10219. We have seen the Dow trade sideways since Jan-2nd and the time has run out. It must move higher next week or risk a serious technical drop.
The Nasdaq closed down for the day due to a sell program at the close but it was still a bullish day. How can I say that with a -7 loss? Remember Thursday, the Nasdaq sprinted ahead of the other indexes in front of the Intel news and closed at nearly a two week high at 2054. The index had been trending up since its most recent low on Feb-24th and had soared to 2064 on the day of the Greenspan speech before getting killed on the interest rate worries. Those worries dropped it back to 2020 and it recovered to trade most of Friday over 2050 resistance again until the closing sell program. Look at a short term chart and you will see the bullish uptrend. The closing program knocked nearly -10 points off the gains but was not material to overall market sentiment. Much of the weakness the Nasdaq struggled to overcome was due to another drop in the SOX prompted by the weak Intel guidance. Everybody forgot about Intel in the Jobs hoopla. Hopefully TQNT and TXN on Monday will erase that memory. The challenge for the Nasdaq is the 50dma, which is at 2060 and above the current price not below it. If you have seen my Nasdaq chart over the last week you have seen the triple threat resistance at 2060 and it is not going away. We traded over it on Friday on the opening bounce but it quickly reasserted itself. Like the Dow and the critical 50dma support test the Nasdaq is currently at a pivotal resistance area. It MUST break this 2060 resistance next week or risk a retest of 2000.
The most positive market event on Friday was the new highs on the Russell and Wilshire. The Dow is languishing but it is only 30 stocks. The Wilshire is the top 5000. If you were going to pick one for the health of the overall market I would pick the Wilshire. I know the Dow is the most recognized and most quoted index but it is not reflecting a correct picture of market strength. The Russell closed only -2 points from a new closing high. The Wilshire did close at a new high. These indexes are only a heartbeat away from breakout mode and represent a truer picture of the market.
Wilshire-5000 Chart - Weekly
The calendar is working in our favor with no material economic reports next week. There are plenty of reports but none that are earth shaking. The PPI for February, previously scheduled for next Friday, has been cancelled just like the PPI for January. There are no new dates for either report. The mid quarter update process is continuing and chip makers TQNT and TXN will give us their guidance on Monday after the close. There are also more than a dozen tech conferences next week that will stimulate tech interest. We are only three weeks away from quarter end and funds will use the next couple of weeks to dress up their portfolios for the quarterly statements. We are only five weeks away from the start of the Q1 earnings reporting cycle beginning the week of April-12th. Next week is the week before March option expiration and should have a bullish bias. This is the time where any April earnings run should begin. The keyword was "should". We all know there is no starting bell and no hard and fast rule that says we will even have an earnings run. BUT, if it is going to happen it should start soon.
Despite the apparent neutral finish for the Friday on the major indexes, Dow +7, Nasdaq -7, the internals were strongly positive. We had the highest volume of the last two weeks and advancers beat decliners 4410 to 2882. All on bad (good) economic news. Were it not for the insane Martha Stewart activity that took over the NYSE Friday afternoon we could have seen a stronger finish. Trading activity in all but MSO came to a total stop once the verdict news hit the airwaves. Hopefully the broadcasters will wear themselves out before Monday and we can go on with business as usual.
I could be all wet about my current market view and it certainly would not be the first time. Bears keep finding more excuses to short the market and to their dismay bulls keep buying the dips. So far the bulls have been winning with a whopping 813 new highs on Friday as proof. Until these conditions change I am going to keep buying the dips and suggest you do the same. Just remember the two key points for next week. The Nasdaq MUST break 2060 and hold it and the Dow MUST NOT break the 50dma at 10550 by any large amount. As long as those conditions are met the bulls are still in control.
Enter Very Passively, Exit Very Aggressively!