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Market Wrap

Hot Potato, Hot Potato

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The jobs numbers have been the hot-potato issue this week, and indeed those numbers came in hotter than expected. That potato had been baking all week, however, and by midmorning Friday, articles featured titles that credited the jobs number with bouncing the markets. Those articles looked to the downward revision of January's number to 170,000 and the slight moderation in the hourly earnings component of the report as prompting that bounce.

At least as likely in this writer's opinion, the week had seen a sell-the-rumor effect and market participants were ready for the buy-the-fact follow-up. Commentators across the globe had been speculating on our jobs numbers for two weeks and all had positioned their portfolios where they wanted them. After digesting the numbers, participants bounced the markets. When the February Treasury Budget was released in mid-afternoon, the record $119.2 billion deficit produced a dip, but that dip was soon reversed in most indices.

Even with newly heightened interest-rate worries and in the face of rising bond yields, the financials led indices higher. Also helping to lead the indices higher, at least early in Friday's session, were the embattled semiconductor and computer hardware sectors, suggesting the possibility that the bounce could have been an oversold bounce. That's especially true since the SOX could not maintain most of its gains.

When all was said and done, the SPX has spent the last four days chopping around between moving averages that offer support and resistance. When writing Wednesday's Wrap, I counseled to watch for a rollover Thursday, noting that I thought indices needed at least one more day of choppy consolidation. Indices have since had two days of choppy consolidation.

Annotated Weekly Chart of the SPX:

The Dow also saw buying action, but there's been a suspicious tendency lately to drive this narrowly based index higher. That could be looked at as a defensive move into blue chips, and perhaps also an attempt to show mom and pop newspaper readers that the stock markets perform well. While traveling recently, I was frustrated by a radio station's stock market updates, as those updates included only the Dow's figures. Many still count the Dow as "the" stock market.

However, an upgrade of GE and speculation that its Universal Pictures studio might be in talks with Amazon for AMZN to provide downloadable movie service prompted that Dow component and big cap's rise. With GE's help, the weekend editions of newspapers can tout the Dow's recovery from the week's sell-off. The Dow even attempted a breakout, but its chart is an ugly and difficult-to-interpret one.

Annotated Daily Chart of the Dow:

This index may not yet be through chopping around between support and resistance. Near-term resistance is at that descending red trendline and near-term support at the 30-sma. Next and stronger resistance lies at February's high, and next and stronger support lies at the 50-sma or possibly even the 72-ema. It's easier to run this index higher than it is many others, so watch for a possible attempt next week, but you want to see corroboration from the other indices before you believe too strongly in the strength of the markets. For now, I'd recommend small positions that sell resistance and buy support.

That corroboration from other indices did not come from the Nasdaq on Friday. The Nasdaq had also rolled over Thursday, as I suggested as a possibility for markets when writing the Wednesday Wrap, both because of chart characteristics and seasonal tendencies. I'd suggested that bearish positions be protected at Wednesday's low, which is where the Nasdaq stopped Thursday. However, Friday it punched down to the 100-sma, a possibility that I'd mentioned but thought less likely.

After bouncing, the Nasdaq barely managed a close back above the 72-ema and at the former triangle's support. That's not particularly convincing of strength and it wasn't corroboration of the Dow's attempted breakout.

Annotated Daily Chart of the Nasdaq:

Since an early bounce in the SOX helped prompt bounces in other indices, a look at that chart might be instructive. That chart is an ugly one, but still one that preserves the possibility of a bounce attempt early next week.

Annotated Daily chart of the SOX:

U.S. nonfarm payrolls for February started the Friday's releases and ended two weeks of speculation from U.S. and foreign commentators. Payrolls rose a greater-than-expected 243,000, the Labor Department noted in its 8:30 release this morning. Some sources pegged the expected number at 206,000-210,000, but whisper numbers had been as high as 250,000. The jobless rate inched up to 4.8 percent from January's 4.7 percent, with January's number having been a five-year low. The labor force participation rate increased to 66.1 percent. Average hourly earnings rose 0.3 percent for the month and 3.5 percent for the last year. That 3.5 percent growth worries those who now fear that the Fed "will be around longer" as one CNBC commentator voiced his concern that rate hikes will not end as soon as had previously been hoped.

Other data revealed that weather may have impacted the average workweek, with that workweek falling to 33.7 hours from January's 33.8 hours. The manufacturing workweek rose by a tenth of an hour, however. Payroll growth was broad based across the various industries, although manufacturing firms did trim their workforce by 1,000 jobs.

With little slack in the job market and wages ticking higher, inflationary pressures can gain a foothold. The Fed faces a difficult task of controlling inflation, if inflation should build, without shutting down the growth engine that the housing market has provided the economy. For Friday, however, market participants decided that the news was no worse than expected and they turned to positive news.

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They did not neglect to send the dollar higher, however, with our currency at a one-month high against the yen. The dollar often strengthens against other currencies when it appears that our rates will be further hiked. When turning to positive news, market participants also ignored the Fed's Fisher's statement that if the Fed was going to make an error, it should make that error on the side of tightening too far rather than being too loose. Some term that statement old news, however, although it's still not welcome news to those who had hoped that rate hikes were nearly done.

Today's positive news came from Walt Disney (DIS), Air Products (APD) and Nucor (NUE). DIS reiterated its forecast of double-digit earnings growth through 2008. Morgan Stanley added APD to its U.S. Model Portfolio. NUE raised its earnings estimate for the first quarter, and this action also boosted the stocks of peers and competitors. All three companies' stocks saw gains, but only NUE held onto all of those gains into the close.

Other positive news for some was the decline in the crude contract, although it closed off Wednesday's three-week low of $59.25, at $59.96. Geopolitical tensions still abound, but the International Energy Agency has assured the world that if Iran cuts exports, the IEA will release inventory from their strategic stocks. That statement may have tempered gains.

The afternoon's release of the February Treasury Budget revealed a record $119.2 billion deficit, as mentioned earlier, but the impact on equities appeared muted. Seasonal patterns usually produce slower receipts in February as the government mails out those tax refunds while the majority of those owing additional taxes haven't yet paid. Hurricane and weather-related expenditures drove up costs.

Another reason behind the muted impact might be that the cumulative deficit for the fiscal year to date moved down slightly, to $217.5 billion from the previous $223.4 billion for the same five months last year. The government forecasts that the year's deficit will be $423 billion.

Friday afternoon also included the release of February's U.S. Leading Inflation Indicators, with the ECRI falling 0.3 percent after January's 1.7 percent climb. The smoothed three-month average dropped to a 3.5 percent gain from the previous 4.6 percent gain. Another leading inflation index, the FIBER index, also dropped in February, by 0.65 percent in that case. These figures perhaps assuaged rate-hike fears produced by the morning's release of job's number.

Other economic news also provided some comfort, although it perhaps indicates a heating-up of the economy, too. A tightening in the inventory/sales ratios was seen when January's wholesale inventories rose a less-than-expected 0.1 percent while sales trended up 1.0 percent. The inventories/sales ratio moved to 1.14/1, down from December's 1.15/1. Strong declines in auto and drug inventories helped produce that lower inventories number.

Next week will include a number of important events to be watched. Economic reports include the fourth quarter's Current Account figure, February retail sale, and January's Business Inventories on Tuesday. Many reports will be crammed in on Wednesday, with the MBAA's weekly report on mortgage activity, February's Export/Import prices, March's NY Empire State Index, January's Net Foreign Purchases, the usual crude inventories, and the Beige Book. Thursday follows with Initial Claims, February's Building Permits, February's CPI, natural gas inventories and March's Philly Fed number. Friday rounds up the week with February's Industrial Production and Capacity Utilization and March's Preliminary Michigan Sentiment.

Many of those numbers have the capacity of moving the markets, notably Retail Sales, the Beige Book, Building Permits, CPI, and production and capacity utilization figures. January's Beige Book noted some scattered tightening in labor markets, but indicated that the wage increases were moderate. Many will watch to see what this Beige Book says about the labor markets, particularly after Friday's jobs release and in view of heightened rate-hike concerns.

Earnings slow, but do include Goldman Sachs (GS) on Tuesday and Bear Stearns (BSC) on Thursday.

Next week is option expiration week, too, an event that shouldn't be ignored. The tendency lately has been for much of the volatility that used to come during opex week to occur the Thursday and Friday of the previous week. If that's true, that tendency could contribute to what's showing up on charts, too: the possibility for another day or two of chop. Many indices show the possibility of a continued bounce attempt for Monday, but the Dow, ending at resistance, and the Nasdaq, ending at former support, worry me. Watch for the possibility of a rollover from current levels, although my greatest expectation is for a continuation of the oversold bounce.

As I mentioned Wednesday, if there had not been such a persistent bid under the market since March, 2003, I would suggest more strongly that nearest and first resistance would be likely to hold and newly and tentatively established support to hold, too, at least for another day and possibly two. However, there has been that bid, and it's been accompanied by wild thrusts higher that come out of nowhere. My suggestion is to trade with smaller positions than usual, to buy support, which means that you're probably already too late if not already long, and sell resistance, but to be ready to jump out of that position if a wild thrust against it occurs.

Perhaps by Wednesday, markets will be ready to break out of these new consolidation zones if they haven't already done so, but you'll have guidance from others both Monday and Tuesday evenings to help you. If you want moment-by-moment guidance, turn to the helpful comments by the writers on the Market and Futures Monitors.
 

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