It was a volatile week for stocks. The U.S. market was shaping up for its third weekly decline but traders bought the dip on Thursday near technical support. Friday's jobs report helped spur the rebound higher and the major indices posted a gain for the week, ending a two-week decline. The Dow Industrials did snap a record-breaking 20 positive Tuesdays in a row. However, the DJIA is still building a trend of 160 days in a row without a three-day pullback. This feat has not occurred in more than 60 years.

Meanwhile it was a rough week for the U.S. dollar, which plunged on economic data and crashed against the Japanese yen. This move in the dollar helped fuel gains in commodities like oil but precious metals turned lower. Gold was weak on Friday and silver has fallen to new multi-year lows. Speaking of lows, in spite of the jobs data on Friday, the U.S. employment rate (number of workers) remains near a 30-year low at 58.6%.

The U.S. economic data last week was mixed. April saw American home prices rise +12.1% year over year. That's the biggest one-month gain since February 2006 (during the housing bubble). Unfortunately, the rise of real estate might stall because mortgage rates are rising. This last week saw mortgage rates surge from 3.81% to 4.0%, which is a new one-year high. Mortgage applications fell -11.5% for the week.

Automobile sales came in strong with Chrysler reporting their best sales growth since mid 2007. Ford was a winner with +14% growth. GM missed expectations with only +3.1% growth. The ISM manufacturing data was a big disappointment with a drop from 50.7 in April to 49.0 in May. Economists had been expecting a small improvement. May's reading below 50.0 is the first contraction-level report since November 2012 and it's the lowest ISM manufacturing report since June 2009. The ISM services (non-manufacturing) report went the opposite direction with a rise from 53.1 in April to 53.7 in May. The Federal Reserve's Beige Book report was a non-event with no real change. The 12 fed districts said growth remains modest.

The big report for the week was the non-farm payrolls (jobs) report on Friday morning. Economists were expecting +169,000 new jobs in May (the prior week's estimate was +165K). The government said the U.S. gained +175,000 jobs, which was up from the prior month's downwardly revised 149,000. The unemployment rate ticked up +0.1% to 7.6% as more than 400,000 people re-joined the labor force and started looking for work. Somehow the market decided that Friday's jobs number was a "goldilocks" number. It wasn't too hot or too cold and keeps the Federal Reserve's QE program intact. The markets had already started rebounding from Thursday's intraday low and the jobs number spurred the rebound higher.

A few thoughts on the jobs number. The market is a little too preoccupied with a monthly estimate that is full of errors. This number is constantly revised by tens of thousands and subject to massive seasonal adjustments. Instead market participants should note that the trend, while relatively steady, actually seems to show shrinking job growth. We're only averaging +133,000 a month.

This past year saw +1,596,000 new jobs created. Yet -1,741,000 people dropped out of the work force. This is not improvement! I mentioned earlier that the U.S. employment rate is near a 30-year low of 58.6%. It certainly looks like the Federal Reserve is getting ripped off by spending trillions of dollars in its multiple QE programs and receiving stagnant (actually negative) job growth. It's widely believed that we need at least +150,000 new jobs a month just to keep up with population growth in this country thanks to new graduates and new immigrants. A recent CNN article suggested this number is closer to 200,000. If the U.S. is only averaging +133,000 new jobs a month then we're not keeping pace with population growth and we're definitely not helping the tens of millions of people who are unemployed.

On the topic of the Fed's QE program, all this talk about the Fed tapering seems very premature. The Fed has said very clearly that they want to see +200K job growth for several months before they would consider slowing down. They also want to see the unemployment rate at 6.5%. Remember, it just ticked higher to 7.6%. The condition that might prompt the Fed to move early and cut back on their QE program would be inflation at 2.5% or more and we're not even close. Inflation is actually decreasing. If you believe that stocks are rising on a Fed-fueled stimulus inspired rally then nothing has changed and the trend remains higher.

Economic data overseas was also mixed. The European Central Bank (ECB) left rates unchanged at 0.5%. The Bank of England also left rates unchanged at 0.5%. This was in-line with expectations. What was surprising was the improvement in Eurozone manufacturing PMI data, which came in better than expected. Countries like Germany, France, and even Italy and Spain said their manufacturing PMI numbers all improved. This is good news if this is signaling a turnaround. Meanwhile the Eurozone's Q1 GDP estimate was left unchanged at -0.2%, thus reminding investors that most of Europe is in recession. Unemployment remains high. France said their unemployment rate hit a 15-year high at 10.8% and Greece unemployment hit another record at 26.8%.

China said their official manufacturing PMI number was 50.8. That was up from 50.6 and definitely better than the 50.1 estimate but it's still awfully close to zero growth (a reading of 50.0). The official numbers do not line up with the HSBC's Chinese manufacturing PMI data, which dropped from 49.6 to 49.2, slightly deeper into economic contraction territory.

Meanwhile in Japan the stock market sell-off continues. The NIKKEI has hit bear market territory with a -20% plunge from its May 22nd close. The weakness would have been worse but supposedly the Bank of Japan stepped in and bought equity ETFs on Friday, which buoyed the market and Japanese equities pared their losses.

Major Indices:

The S&P 500 managed a +0.7% gain for the week and ended a two-week pullback. From the index's intraday high on May 22nd (1687) to the intraday low on Thursday (1598) we have witnessed a -5% pullback. Traders bought the dip at technical support near the 1600 level and the S&P 500's rising 50-dma. I cautioned readers last week to look for a bounce from the 1600 level.

The S&P 500's rebound from 1600 is encouraging albeit somewhat predictable. The rebound has not yet broken the three-week trend of lower highs. Now if you're bullish you could argue that the S&P 500 has been building a bull-flag pattern but it has yet to actually breakout of the flag consolidation.

On a short-term basis look for overhead resistance near 1650, 1685, and 1700. We can watch for support near 1600. If 1600 breaks down then the S&P 500 will likely fall toward 1540 or its 100-dma (currently at 1565).

chart of the S&P 500 index:

The NASDAQ composite rebounded off its 40-dma from Thursday's lows and eked out a +0.39% gain for the week. This index also appears to be building a bull-flag pattern. A close above the three-week trend of lower highs would be bullish and could spark more short covering.

On a short-term basis, if stocks pull back, look for support near Thursday's low (3378) and if that fails then possibly the 50-dma, and below that 3300. On the other hand a breakout from the flag pattern could signal a run towards 3600 or higher.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index has produced a similar rebound with traders buying the dip on Thursday. The $RUT underperformed its larger cap peers on Friday with just a +0.8% gain. For the week the $RUT is only up +0.3%.

The $RUT also has three-week trend of lower highs. The potential bull-flag pattern is not so clean cut as the one seen on the SP500 or the NASDAQ.

The 1,000-1,008 area is still overhead resistance. A breakout higher could signal a run toward the 1,040-1,050 area. Meanwhile the $RUT should have support in the 960-950 zone and its 100-dma.

chart of the Russell 2000 index



Economic Data & Event Calendar

This week will see a bit of a lull in the pace of economic data. I don't see any market-moving reports.

Economic and Event Calendar

- Monday, June 10 -
Italy's GDP estimate

- Tuesday, June 11 -
wholesale inventory data
Bank of Japan interest rate decision

- Wednesday, June 12 -
U.S. 10-year bond auction
USDA Crop report
Eurozone's industrial production

- Thursday, June 13 -
Weekly Initial Jobless Claims
U.S. retail sales data
import/export price data

- Friday, June 14 -
Producer Price Index (PPI)
industrial production and capacity utilization
University of Michigan Consumer Sentiment for June

Additional Events to be aware of:

June 15th - G-8 meeting
September - U.S. debt ceiling deadline

The Week Ahead:

On a short-term basis the U.S. market's two-day bounce from support looks bullish. The longer-term trend still has a bullish pattern of higher lows. If the major indices can breakout from their bull-flag patterns we could see a positive surge in momentum. It is worth noting that volume has not really confirmed this rally but then again volume has been weak for months and summer time usually sees volume slow down even more.

All this "taper" talk about the Fed's QE program seems out of place. Unfortunately it probably isn't going away. There is a two-day FOMC meeting on June 18th-19th. Thus the future of the Fed's QE program will remain front and center until the Fed-heads put this taper turmoil to rest. Then again they could be intentionally trying to slow down the stock market by discussing the eventually tapering of the Fed's QE program. If the Federal Reserve does announce something at the June meeting it could rock the market since no one expects any changes for several more quarters.

I do not see any changes from my comments last week about Japan and its Catch 22 predicament given Japanese markets and its QE program. I also don't see any changes from my comments about a growing proxy war in Syria between the west (U.S. & U.K.) and Syria's allies Russia and Iran. You can read my comments here.

I remain cautiously bullish on stocks. I'd like to see a deeper correction lower but we may not get it. Trade cautiously.

James