Thank you, Santa! The Friday morning jobs report was horrendous. Economists were expecting +130,000 new jobs with +140,000 in new private payrolls. Instead the Labor Department said the nonfarm payrolls report showed +39,000 new jobs and only +50,000 in private payrolls. There were several analysts expecting +175,000 new jobs. This was the perfect excuse to sell stocks, especially after the recent rally. Yet there was barely any profit taking on Friday morning. After churning sideways for a few hours the up trend resumed. If that's not a gift from Santa to the bulls I don't know what is!
Overall the week played out as expected. The EU and IMF managed to engineer a bailout for Ireland. This cooled fears over a sovereign debt default and the potential domino effect for all the PIIGS countries. The euro currency began to rally. This put pressure on the U.S. dollar, which has reversed lower after hitting two month highs in November. Now the dollar weakness is refueling the commodity rally. Gold is soaring and nearing its all-time highs again. Commodity plays are back in vogue. Economic data in the U.S. continues to show improvement, except for the labor market. The steady stream of data helped fuel the rally in U.S. markets.
We are in a traditionally bullish time of year for the stock market. Not only are traders looking for a "Santa Claus" rally but the "January effect" has gotten earlier and earlier each year so now it takes place in December. The January effect is where money managers start placing their bets in the small cap space. With stocks in an up trend and investors expecting the U.S. and global recovery to pick up speed in 2011 we want to maintain our bullish bias on stocks.
The S&P 500 index has broken out of its 1175-1200 trading range and is now challenging resistance at its 2010 highs set last month. While it doesn't technically fulfill the requirements for a cup-and-handle pattern the S&P 500 certainly looks poised to breakout past 1225 and surge higher into yearend. I wouldn't be surprised to see a little resistance in the 1240-1250 zone but the 1200 level should act as new support.
Daily chart of the S&P 500 index:
Weekly chart of the S&P 500 index:
The NASDAQ continues to show strength thanks in part to strong gains in the semiconductor sector. You'll notice on the daily chart that the NASDAQ found technical support at its rising 40-dma. Meanwhile the SOX semiconductor index has been showing lots of relative strength. The chips have broken out past resistance near the 400 level and set new two-year highs. It is worth pointing out that the semis do look short-term overbought and due for some profit taking.
Daily chart of the NASDAQ index:
Weekly chart of the SOX semiconductor index:
The small caps are showing plenty of strength with the Russell 2000 index breaking out past its April 2010 highs. The next hurdle is the 760-765 zone where the $RUT failed three times back in 2008. Odds are good that the current rally could stall there and we might see some profit taking. Of course we will want to use the decline as a new entry point for bullish positions.
Daily chart of the Russell 2000 index:
Assuming North Korea doesn't start shooting again and Spain or Portugal don't see a sudden meltdown then this week will likely be dominated by more economic data. There isn't a lot on the docket. Thursday will bring the weekly initial jobless claims, and the wholesale inventory numbers. Friday we'll see the trade balance report for October, the import/export prices, and the Michigan Sentiment figures.
In summary, my bias remains bullish. However, stocks appear a little bit overbought here. With the NASDAQ and S&P 500 testing resistance I would look for a little decline this week and use the dip as an entry point if we see our candidates pull back toward support.