Stocks rallied on Thursday pushing the Dow, S&P 500, and Nasdaq into new high territory as we saw 0.7% plus gains in the major large cap indices. The Dow gained 136-points on the day and as the new month kicked in, we saw what looked like a shifting into some of the more beaten down sectors, particularly the small caps yesterday.
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While the charts looked better with that bull flag on the S&P 500, the bulls seemed a little tired after the big rally off of the May 17 sell-off. Well, they got a wake up call yesterday.
As we mentioned yesterday, the first trading day of the month can be a market mover as reallocations from money managers can be a source of volatility. It doesn't happen every month, but sometimes the last day or two of the month, or the first day or two, can mark a turning point so while we saw big gains yesterday, let's see if we see some follow-through on Friday and into next week.
I'm not saying it is going to happen, but we only have to go back to March to see the last big day for stocks on the first trading of the month that sent the indices to new highs, only to see it become the peak for the next two months. The chart above shows that it is no an uncommon occurrence.
This morning we get the May jobs report and perhaps it will set the tone for the follow-through, but even the jobs report can get us leaning the wrong way if it does move the market. Estimates are looking for a gain of 185,000 jobs and an unemployment rate of 4.4%.
There's more on the plate next week as congressional testimony begins with Comey, and of course then the Fed is set to potentially raise interest rates again the week after that so there are some catalysts on the schedule.
The S&P 500 (C-fund) broke out of its bull flag, as we might expect a bull flag to do, but after the big rally that created the flag pole, I thought the flag would develop for a while longer before resolving itself. Instead, whatever the market liked yesterday, the pulling out of the Climate Change deal, the weekly employment numbers, etc., I'm not really sure, satisfied the bulls enough to get them to buy into uncharted territory.
The DWCPF (S-fund) had a big day as money managers seemed to rotating into some of the more beaten down areas of the market yesterday, which is not uncommon on the first trading day of the month. It is now reaching up toward recent highs, but still lagging the large caps.
The Dow Transportation Index also had a big day as one of the other indies that had been lagging this year. It moved above a lot of key resistance over the last week or so so it looks better. The price of oil remains low and that is helping here.
The EFA (EAFE Index / I-fund) was up but again I draw my attention to the Chinese market which shows signs of stalling after a relief rally up to resistance. There are credit issues in China that I would think could be an issue for us eventually, but we probably won't hear about it if or until this chart breaks down.
The AGG (Bonds / F-fund) pulled back after its recent breakout from a bull flag, and it opened a new gap on the way down. It found support at the top of the flag so it will be interesting to see if that holds. A weaker than expected jobs report would likely send bonds higher again and fill that gap, while a strong report would push it back into, or below, that bull flag, and start looking at those gaps below.
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Thanks for reading. Have a great weekend!
Tom Crowley
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