I'll be honest with you. I'm a little bit surprised that the market didn't move more on Friday's jobs report. After watching the S&P 500 hover between the 1,080 and 1,110 zone for more than three weeks I really wanted to see a decisive move one way or the other after. The S&P 500 disappointed me again. The index hit new 2009 highs on an intraday basis but short-term the index is actually forming a bearish megaphone-shaped topping pattern. However, I would turn my focus on the small caps.

The small cap stocks used to see a seasonal rally in January every year. It happened with so much regularity they started calling it the January effect. Then as the phenomenon was publicized each year in the media traders started front running the January effect and it started happening in the last week of December, then the last two weeks of December. Now the whole month of December usually has a bullish tone as the "Christmas rally" runs into the January effect. So why do we care about the small caps? This section of the market has been underperforming since October. The big caps may be the "generals" in the market but the army won't move unless the "soldiers" like the small caps participate.

Thankfully the small cap Russell 2000 index displayed some relative strength last week and seriously outperformed the big caps on Friday. The Russell's close over resistance near the 600 level and its 50-dma is very short-term bullish and if it can close over the mid November high near 605 I'd be a lot more optimistic.

The transportation sector is another group I'm seeing bullish developments. The $TRAN transportation index broke out above key resistance on Friday to set a new 2009 high. The move has been fueled by big gains in the airlines and some decent strength in the railroads. Traditional Dow Theory suggests you can't have a sustainable rally without participate in the transports so this is good news. I'm a little concern that the $TRAN has rallied right to resistance on its weekly chart (see below). We'll have to wait and see if there is any follow through on Friday's rally.

Let's talk about the jobs report for a moment. Economists were expecting the November jobs report to show a loss of 130,000 jobs. There were a few estimates for less but most of us were very surprised to see the government's employment number come in at -11,000 instead of -130,000. Furthermore the government revised both the October and September jobs figures by almost +160,000 jobs. This is very short-term bullish. Adding to the bullish-ness of the report was a small improvement in average hours worked. Employers are not going to start hiring new people when they're current workers need more hours. The average hourly work week improved from a record low of 33.0 in October to 33.2 in November. We still have a long way to go but it's a step in the right direction.

Now let's talk about what concerns me about the jobs report. Most of the improvement was all temporary jobs. Now you could argue that employers are going to hire temps first before they hire full time workers so this could be seen as an improvement. However, we are still losing jobs in the manufacturing sector. Plus the minor improvement from 10.2% unemployment to 10.0% was partially fueled by workers falling off the list as their unemployment benefits run out. One of the worrisome signs was that those who have been unemployed for a significant amount of time are not finding jobs. Now it's entirely possible that in future jobs reports the November number could be revised higher and actually show a net gain for the economy. Unfortunately it doesn't change our expectations for two or three quarters of economic growth before the economy slips back into a double dip recession.

The much stronger than expected jobs number spooked investors. Friday's concern was that the labor market was improving too fast and that the Federal Reserve would have to raise rates sooner than expected. Higher interest rates mean a stronger currency. Right now being short the dollar is an extremely crowded trade and thoughts of higher rates sparked a massive short squeeze. A stronger dollar means weaker commodities, which took out some of the strongest sectors and fueled a heavy day of profit taking in gold. Now gold was overbought and due for some profit taking so I'm not that concerned. The labor market isn't going to improve that fast and the Fed isn't going to raise rates any time soon. Thus this bounce in the dollar should be temporary but that doesn't mean the bounce is over yet. Lately the relationship has been dollar down = stocks up and vice versa. If the dollar continues to bounce we could see more volatility.

On a short-term basis I'm actually growing more optimistic here. We've got 17 1/2 trading days left in 2009. The general trend is up. The jobs report is showing improvement even if I think it's temporary it's still bullish. We could see another chase for performance into the end of the year. Look for a strong close over 2200 for the NASDAQ composite and 1115 or 1120 for the S&P 500 and we can get more aggressive with our bullish trades.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Transportation Index:

Weekly Chart of the Transportation Index:

Chart of the Russell 2000 Index:


Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown