Improving hiring in multiple economic reports plus a calming of tensions surrounding Libya put the bulls into stampede mode on Thursday.

Market Statistics

Thursday was a case of good news breaking out all over and buyers rushed back into the market in anticipation of a great jobs report on Friday. Shorts were crushed and the bearish negativity from earlier in the week was almost completely erased.

The first report out this morning was the weekly Jobless Claims, which came in at 368,000 and a drop of -20,000 from the prior week. This is the second consecutive week of declines under 400K and the lowest level in 2.5 years. This suggests the long awaited jobs recovery is starting to blossom. Unfortunately it has a long way to go but at least we are finally moving in the right direction.

The Monster Employment Index rose +7 points to 129 from 122 in January. The Monster index is calculated by measuring online help-wanted ads. The seven-point gain was not particularly strong but it is still a move in the right direction.

The biggest report for the day was the ISM Nonmanufacturing Index, which came in at 59.7 for February. This is the highest level since August 2005. The internal components also rose by an average of two points with the Business Activity component rising to 66.9 from 64.6. The employment component rose +1.1 to 55.6 and the highest level since April 2006. Exports rose by +3 to 56.5.

The four ISM reports we saw this week all indicated a strengthening of the recovery and a sharp increase in employment. The last time the ISM indexes were this strong was late 2003 and GDP was rocking along at nearly a 5% clip.

ISM Nonmanufacturing Chart

Every report we saw this week pointed to stronger hiring and that has spiked estimates with some whisper numbers as high as 350,000. The official consensus estimate is for a gain of 178,000 with many analysts and brokers individually expecting numbers in the 250,000 to 265,000 range. Bill Gross at Pimco expects "somewhere in the 200,000 category" for the next 6-12 months.

Gross also warned against aggressive budget cutting because of the fragile economy and warned the Fed will have to provide a follow on stimulus program of some sort after QE2 ends. Gross said the sudden removal of $150 billion a month in treasury purchases would create a void that would be disruptive to the recovery. Obviously Gross is talking his own book since he manages $1.2 trillion in bonds and he does not want to see the value of those bonds plunge with treasury prices. I do agree with him that the economy is not quite ready to run on its own and will still need some support. Where that support might come from is unknown. I seriously doubt the Fed will implement a QE3 but stranger things have happened.

Some analysts have started expressing worry that the expectations for the payroll report on Friday have already been priced in after today's rally. The also worry that a payroll miss is now a strong possibility even if the jobs gains come in at the consensus estimate of +178,000. That could be considered a miss given the sudden ramp higher in the whisper numbers.

The last report for the day was the Chain Store Sales for February. The headline number came in at 4.2% and slightly below the 4.7% in January. Despite the minor decline the sales were very strong. Sales were reportedly helped late in the month by better weather and analysts are expecting March sales to be even stronger. However, Easter will come three weeks later this year and shift most holiday sales into April. That makes the comparisons over March 2010 difficult.

In February the biggest gains were in the luxury stores with a +10.1% gain followed by wholesale stores a +7.7%, department stores +5.7% and apparel stores +3.2%.

In stock news Citigroup rallied despite continuing claims they may have to take a $10 billion loss because of a change in tax rates and another $5 billion in losses because of changes in CDO accounting and liabilities from suits over sales of CDOs. Evidently this worry has been priced in over the last couple of weeks. Citi began to fall on Feb 22nd and closed at a two month low on Tuesday. It just seems like every day there is another revelation of billions more in risk. Once they get past these problems it should be smooth sailing but there are definitely stormy waters ahead.

Citigroup Chart

The Treasury Dept expects to get a $6.3 billion payment from AIG after the company sold $9.6 billion in MetLife shares on Wednesday. AIG and the Treasury sold 146.8 million shares of MET at $43.25 and demand was said to be strong. They expected the sale to take a couple days but demand was so strong they closed the book the first day. The shares were received when MetLife purchased AIG's Alico International Insurance Company in 2010 for $16.2 billion. The AIG bailout was valued $182 and through payments like these the government's stake has been whittled down to ONLY 92.2% of AIG's common stock and some preferred shares in two special purpose vehicles holding some MetLife assets and shares in AIA Group and other assets. After payment for the MetLife share sale the Treasury's stake in those special vehicles will decline to $11.9 billion. The Treasury Dept is expected to sell $15 billion or more in AIG stock in late May.

AIG Chart

Apple (AAPL) has rebound nearly to its prior highs over the last week and yesterday's iPad 2 announcement with Steve Jobs in attendance was a major plus. Apple shares rose +7.44 today to close at $360. The iPad 2 was well received and Apple did not feel a need to further discount prices. Goldman Sachs raised the price target to $450 on belief the new iPad would solidify Apple's lead in the sector. Forrester Research said Apple iPad sales would be 80% of all tablets sold this year.

Gartner Inc cut its PC sales forecast for 2011 and 2012 based on expected weaker demand for mobile consumer PCs because of the popularity of the iPad and expected sales of equivalent tablets. Gartner still expects worldwide shipments of PCs to total 387.8 million in 2011. That is a 10.5% increase from 2010 but it is a drop from the 15.9% gain they previously expected. 2012 sales are expected to be 440.6 million units and an increase of +13.6% over 2011.

Apple Chart

Valero (VLO) released its Q1 earnings guidance and it was a blowout. Earnings are now expected to be 76-91 cents. This compares to analyst estimates of 55-cents. The trigger for this earnings blowout is the discount between Brent and Gulf crude prices and the benchmark U.S. WTI crude contract. I have reported on this many times in the past. Storage capacity at Cushing Oklahoma is full and new oil production headed for Cushing has no place to be stored. This is pushing the price of WTI to a $10-$15 discount to Brent or Louisiana Light crude. With the refiners on the coasts forced to pay Brent prices for their oil any refiner with access to a pipeline to Cushing can buy oil significantly cheaper but the refined gasoline is still based on the higher Brent prices. Valero said this condition will last until a new pipeline connects Cushing to the gulf coast. This could take up to two years. The excess oil going to Cushing is coming from Canadian oil sands and from the Bakken, which is currently producing 350,000 bpd. Valero shares gained +8% on the news.

Valero Chart

While on the subject of oil prices we saw Brent pullback to $113 intraday from $118 on Wednesday. WTI declined to $100 but rebounded to over $102 after the close. Prices fell as various entities suggested peace plans for Libya. Prices rebounded when news broke that opposition forces had strengthened their hold on critical oil ports and facilities. In the U.S. the national average for gasoline prices rose to $3.43 with prices on the coasts significantly higher. Oakland saw $3.83 and Bridgeport CT $3.66. If Brent holds over $110 we can expect to see $4 gasoline on the coasts.

Brent Crude Chart

The U.S. dollar closed at a new three month low as referenced by the dollar index. The decline today was due to a bounce in the Euro after ECB president Jean-Claude Trichet said the ECB could raise interest rates in April. The bank reiterated its 1% rate for the 23rd consecutive month but warned rate hikes are coming. Most analysts had not expected a rate hike until August at the earliest. This highlights the risk the Fed could also make a change in its statement at the March 15th meeting.

Dollar Index Chart

The IMF warned today that food prices rose +2.2% in February and they will likely remain relatively high in the months ahead. The IMF said the sharply rising food prices were a serious concern for the four billion poor people on the planet. Some analysts have blamed the Fed for the rise in prices because of their QE2 push and its impact on the dollar. A weaker dollar means it takes more dollars to buy the same amount of wheat or corn and that raises the price of food. The IMF said the impact of higher oil prices on food has yet to be felt but they "assumed" the reasons for the spike in prices would be resolved shortly and prices would decline without a major impact on the food chain. They did warn if oil prices don't decline the price of food would move higher.

Volume was decent today but not strong. A total of 7.7 billion shares were traded suggesting traders were still not buying with conviction. This compares with 8.6 billion on Tuesday when the market was down hard. Technicians are always disappointed when up days don't have as much volume as down days. However, volume on down days is increased by stop loss selling and forced margin selling. On the upside there are limited buy stops to add to volume and there is no automatic margin buying. I am not saying volume is not important but comparing Tuesday and Thursday I don't think that difference is material.

Today's rally was almost all short covering at the open. The upward progress after 11:AM was minimal. The economic news coupled with some positive news out of Libya caused the futures to be wildly positive overnight and that created a monster short squeeze. When Wednesday's test of S&P 1,300 did not result in an immediate rebound it increased the conviction of the bears and they loaded up on the afternoon decline. They reaped the results of betting against positive economic fundamentals at today's open.

On a side note I got an email today from a reader who thought I was too bearish. If that is the opinion readers are gleaning from my writing then I need to find a different profession. I have been advocating buying the dips for months and poking good-natured fun at the bears for constantly trying to short a bull market. I actually get a lot of mail on that topic as well. On Tuesday I expressed concern "IF" the S&P could not hold support at 1295 but I still recommended buying the dip to that level. I find that hard to believe that is a bearish outlook.

The S&P rebounded to close at 1330 and a two-week high. I would have rather seen the rally in a normal pattern of buying but I will take it regardless of the method. I am sure there were more shorts loading up at the close so the potential for a move higher still exists. I am concerned that anything under 200,000 on the payroll numbers will be considered a miss BUT it is still a dramatic improvement over the 36,000 job gains in January.

The S&P cash rallied to a level that has no real resistance once over 1330 until 1344 but the S&P futures stopped just short of resistance at 1332 and its congestion highs from Tuesday.

S&P Futures Chart

S&P-500 Chart

The Dow rallied to close at the highs for the week and Tuesday's loss is in the rear view mirror. The industrials were the biggest drivers with IBM, CAT, BA, UTX and MMM the biggest gainers. Like the S&P the Dow came to rest right at resistance so everything depends on Friday's open and the payroll report. Support is well below at 12000 and resistance at 12275.

Dow Chart

The Nasdaq rebounded strongly thanks to PCLN +15, ISRG +9, GOOG +9, AAPL +7 and some strong performances by dozens of other techs. Many of the rebounds were clearly short covering with big gap opens on the individual charts. Others were actually fundamental gains thanks in part to the Gartner estimate for +10% PC sales improvement in 2011.

The Nasdaq closed right at critical resistance at 2800 and like the other indexes our fate is in the hands of the payroll numbers and how much of those expectations are really priced into the market. Support is well below at 2740 and once over 2800 resistance is the recent highs at 2840.

Nasdaq Chart - 90 min

Nasdaq Chart - Daily

The Russell turned in an outstanding performance with an 18 point gain of +2.2%. Like the other indexes it was all short covering and I can't chalk it up to fund manager exuberance over small caps. It is what it is. The Russell did close slightly above recent resistance at 827 but not enough to really call it a breakout. Support is now 805.

Russell Chart

In summary it is all about jobs and the market reaction to the number. With the economic fundamentals rebounding much stronger in recent weeks I would be surprised to see a major meltdown as long as the number is close to the consensus of +178,000. Traders may take profits from Thursday's spike but I doubt we will revisit support at S&P 1300 again. If we did I think it would take on a new bearish perspective. A second test like the dip to 1302 on Thursday is considered confirmation. A third test would be considered negative confirmation. Let's hope we don't go there.

Trade the trend until the trend changes then reevaluate. Blindly sticking to a confirmed bias will keep you frustrated and broke.

Jim Brown

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