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.
New Long Plays
Aetna - AET - close: 50.94 change: +1.23 stop: 49.74
Why We Like It:
Picked on March 12 at $50.94
Aeropostale - ARO - close: 30.30 change: +1.83 stop: 29.99
Why We Like It:
Picked on March xx at $xx.xx <-- see TRIGGER
BE Aerospace - BEAV - close: 24.25 change: +0.67 stop: 22.95
Why We Like It:
Picked on March 12 at $24.25
New Short Plays
Long Play Updates
Hewlett Packard - HPQ - cls: 32.99 chg: +0.23 stop: 31.99*new*
The market rally on Friday was certainly a welcome respite from the recent weakness. Yet shares of HPQ still seem stuck in a short-term sideways trading range. We would look for a move over $33.25 before considering new bullish positions. Please note that we're inching up our stop loss to $31.99. More aggressive traders may want to leave their stop loss under the rising, simple 50-dma now at 31.62. We are targeting a move into the $35.00-35.50 range.
on February 22 at $32.94
IAC/InterActive - IACI - close: 30.21 chg: +0.38 stop: 28.99*new*
Internet stocks closed in the green on Friday despite a new relative low for their leadership stock GOOG. Traders bought the dip in shares of IACI near $29.50 and the stock rebounded back above the $30.00 mark. Readers can use the bounce as a new bullish entry point or wait for a move over the March high ($30.60) before initiating new positions. A move over $31.00 would produce a new P&F chart buy signal. Our target for IACI is the $32.90-33.00 range. We are adjusting our stop loss to $28.99.
Picked on March 03 at $30.31
SCS Transportation - SCST - cls: 29.22 chg: +0.74 stop: 26.95 *new*
The rally continues for SCST. The stock bounced strongly from the $28.00 level on Friday morning and closed at a new high. SCST is nearing our target in the $29.90-30.00 range. If crude oil futures breakdown next week then we'd expect the transportation stocks to rally on the move. More aggressive traders may want to aim higher than our target range. Please note that we're inching up our stop loss to $26.99.
Picked on March 01 at $27.55
Synopsys - SNPS - close: 21.90 change: +0.02 stop: 21.58
Hmm... traders should take note of SNPS' relative weakness on Friday. The market produced a relatively broad-based rally but SNPS failed to participate in it. Also noteworthy is how volume has dried up in SNPS while it consolidates in a narrow range near technical support at its 50-dma. We are not suggesting new bullish positions at this time. We would wait for a move over $22.25 or over $22.50 before initiating new positions. Our target is unchanged at the $24.40-24.50 range.
Picked on March 02 at $22.49
UST Inc. - UST - close: 40.52 change: -0.54 stop: 39.95
The profit taking in UST continued on Friday and shares dipped toward broken resistance, now new support, at the $40.00 level. Volume was very strong on Friday's pull back. UST was trying to bounce higher by Friday afternoon supported by the 10-dma and 50-dma near the $40 level. Our exit/target range is $41.65-42.00.
Picked on March 05 at $40.55
Short Play Updates
Amkor Tech. - AMKR - close: 8.49 change: -0.01 stop: 9.01
Semiconductor stocks under performed the market on Friday and AMKR was one of them. We don't see any changes from our Thursday night play description but we would be extra careful opening new plays since we don't know if there will be any follow through on Friday's market rally. Our original play description is reposted here:
A very strong earnings report back in early February helped launch the stock in a huge rally that pushed shares from under $6.00 to $10.00. Now it looks like shares have come too far too fast and the sell-off/breakdown in the SOX semiconductor sector index suggests the whole group is going lower. AMKR's short-term technical indicators have turned bearish and its MACD has produced a new sell signal. We do expect the $7.00 level, which was resistance to act as new support. As a matter of fact we will be watching for a new bottom or bounce from $7.00 as a potential entry point for bullish positions. However, short-term we are suggesting shorts and a target in the $7.55-7.45 range.
Picked on March 09 at $ 8.50
Baidu.com - BIDU - close: 49.10 change: +0.78 stop: 52.11
We would be careful about launching new short plays in BIDU. The overall pattern remains bearish for the stock but if the markets continue to rebound next week then BIDU might try and follow and shorts could get spooked. We don't see any changes from our Thursday night play description so we're reposting it here:
BIDU is an aggressive (a.k.a. riskier than normal) short play. The stock is known for being volatile and shares could reverse on us pretty quickly. Fortunately, the long-term trend seems to be bearish. Shares spiked higher on February 22nd after a better than expected earnings report but there was no follow through. Today's breakdown was on above average volume and broke the four-week trendline of support. The MACD is nearing a new sell signal. We are going to use a wide stop loss just in case BIDU tries to fill the gap from this Thursday morning. We are going to target the $41.00-40.00 range. More conservative traders might want to exit near the February lows (around $44). Keep an eye on Google (GOOG). The entire Internet sector might see selling pressure pick up if GOOG breaks under the February low ($337) or the top of the October 2005 gap ($333).
Picked on March 09 at $ 48.32
Hilton Hotels - HLT - close: 23.35 chg: -0.13 stop: 24.06*new*
The good news here with HLT is that the stock failed to participate in the market's rally on Friday. Instead the stock sank closer to technical support at the 200-dma and volume continued to rise well above the average. HLT looks poised to break down under the 200-dma soon. We are not suggesting new positions. Please note we are adjusting the stop loss to $24.06. We're aiming for a decline into the $22.25-22.00 range.
Picked on March 02 at $23.98
Hovnanian - HOV - close: 42.80 change: +0.91 stop: 46.11
Interest rate sensitive stocks, like the homebuilders, bounced on Friday. Shares of HOV were oversold so the stock was due for a bounce. Watch for the $44.00 level to act as short-term overhead resistance. A failed rally under $45 (or $44) could be used as a new bearish entry point. Our target is the $40.50-40.00
on March 05 at $44.85
Officemax - OMX - close: 28.99 chg: +0.09 stop: 29.41
We don't see any change from our previous update. However, if OMX instead reverses and trades over $29.51 or $30.01 aggressive traders might want to consider going long. We're reposting our Thursday night play description here:
OMX looks poised for a breakdown. The stock has bounded higher in the last two months from about 24.20 to over $31.00. Now the stock has drifted back toward its trendline of support and the tug-of-war between the bulls and the bears is getting tight. Shares are hovering back and forth around support/resistance in the $28.85-29.00 region. If the major indices head south tomorrow we'd expect a breakdown in OMX. We're going to suggest a trigger to short the stock at $28.69. If triggered we'll target a move into the $27.10-27.00 range, which should line up with a 50% retracement of its two-month rally.
Picked on March xx at $xx.xx <-- see TRIGGER
Closed Long Plays
LM Ericsson - ERICY - close: 33.92 chg: -0.47 stop: 33.93
We have been stopped out of ERICY. The stock gapped lower on Friday morning to open at $33.98 and then shares dipped to 33.78 before rebounding almost enough to fill the gap and turn lower again. We could not find any specific news to account for the weakness. Our stop loss was $33.93. Traders may want to keep an eye on ERICY as a potential bearish candidate. Friday's session is a technical breakdown under the 200-dma and the failed rally midday is negative as well.
Picked on February 14 at $34.61
Microchip - MCHP - close: 34.88 chg: -0.37 stop: 34.99
The SOX semiconductor index tried to bounce on Friday but the early strength in the sector failed. Yet even the morning bounce in the SOX was not enough to save MCHP. The stock dipped under support at the $35.00 level and hit our stop loss at $34.99 early on.
Picked on March 02 at $36.52
Unisys - UIS - close: 6.61 change: -0.02 stop: 6.58
UIS finally broke down under the $6.60 level and we have been stopped out at $6.58. It is certainly possible that we had our stop loss too tight as the intraday dip in UIS on Friday bounced from its 50-dma. More aggressive players may want to watch for some follow through on Friday's bounce and consider new longs if UIS continues higher.
Picked on February 16 at $ 6.81
Closed Short Plays
Today's Newsletter Notes: Market Wrap by Linda Piazza and all other plays and content by the Option Investor staff.
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