Stocks opened sharply lower on Friday as the overnight futures were already down heading into the jobs report, and it didn't get any better after the 8:30 AM ET report until minutes after the opening bell when the buyers were there waiting enthusiastically. The Dow ended the day up 108-points, but we did see some weakness in the overseas market and the Transportation Index.
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Jobs report came in at +215,000 jobs, which was better than expected, and an unemployment rate of 5.0%, which was a little worse than expected. The participation rate ticked up and that may be what caused the unemployment rate to move up from the prior month's 4.9%.
A while back the Fed had a target for the unemployment rate and the pace of inflation and now both are in the "safe" zone but they still won't raise rates. They tried it in December and the market quickly sold off. So now we are in an election year and it appears the Fed is looking for excuses not to raise rates so as to not impact the election. The stock market has certainly embraced to the dovish policy and recently we've seen a bit of that old irrational exuberance, but with interest rates so low, there isn't a whole lot of options for investors except the stock market where you may be able to get more than 1% or 2% return on your money as you would other investment vehicles.
So the Fed is either seeing trouble in the economy that no one is talking about (Europe and Asia?), or they are just being accommodative until the election passes. Will it be enough to avoid the historical averages of an election year, where the February / March rally tends to run out of steam in April?
The S&P 500 (C-Fund) posted a positive reversal day on Friday after the jobs report. The report wasn't all that impressive but investors are still looking for excuses to buy. At the risk of sounding like an alarmist I am going to compare the current action to that of 2007 - 2008. It's a rare to have a chart repeat exactly, but you'll get the idea. Perhaps the Fed understands this too and it is why they are not acting.
The S&P 500 2007 - 2008.
And what happened after...
The Small Caps (S-fund) peaked their head above the 200-day EMA on Friday and closed above it for the first time in many months. That is a decent sign but it is still too close to call a victory, and the Russell 2000 has not closed above its 200-day EMA yet, which would be more of a confirmation for the S-fund.
The Transportation Index was down sharply early on Friday. It did close down 0.71% and lagged the other indices, but it found support at a very good spot - where the 20 and 200-day EMA met with the rising support line. I would expect that to break on the first test, but the question is whether it will be tested again or whether it is a low for this recent pullback.
The EFA (EAFE Index / I-fund) was also down on Friday but some of that had to do with stocks rallying all afternoon in the U.S. while the overseas markets were already closed.
The other problem was that Japan sold off sharply on Friday and fell back below the 200-day EMA. What this eventually means to U.S. stocks I don't know, but the economic picture outside of the U.S. is getting unstable.
Keep an eye on Greece again. I read a disturbing article about their credit situation and a possible "scripted" crisis. If it's true it would be disturbing on many levels.
The AGG (Bonds / F-fund) was down slightly on Friday after Thursday's big rally. The bond market is believing the Fed won't raise rates, but the question is, is it because of a weakening economy or because the Fed doesn't want to get in the way of the election? Either way, the chart looks bullish for bonds as long as it remains above that red breakout line.
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Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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