Longtime traders and investors know that surprise is a built-in feature of the markets. Especially in volatile times, the market is more likely than not to surprise a majority of those watching it. This was certainly the case for me heading into Friday’s job report, where I felt the main questions were whether traders and investors will ignore what is likely to be an ugly monthly jobs report.
As we all now know, the monthly jobs report was very strong: the largest monthly gain ever recorded. This supported the view of many commentators that the economy was already recovering. Some now believe that the recession is over—and we all hope they are right! However, I have always stressed that one monthly reading, especially of survey data, should be treated with caution until more data points are available. You need more than one data point to signal a change in trend.
The stock market was already having a good week before the jobs report and the market opened sharply higher on Friday. Once again, the Dow Jones Transports and small-cap iShares Russell 2000 led the way, up 10.1% and 8.1% respectively. The Dow Jones Industrial Average was not far behind, up 6.8%.
The 4.9% gain in the S&P 500 was not bad either, as it gapped higher on the open three out of five days last week. It is now only down 1.1% YTD. The Nasdaq 100 Index, which contains all of the large-cap tech stocks, was up only 2.8% for the week but is up 12.5% YTD.
For the third week in a row, the advance/decline numbers on the NYSE were very strong with 2669 issues advancing and 376 declining. The weekly close in the NYSE Advance/Decline line above its weighted moving average (WMA) three weeks ago (the week ending May 22) was a very bullish sign.
It was therefore not surprising that the 61.8% Fibonacci resistance level at 12,075 was overcome with last Wednesday’s close. This gave the long-awaited confirmation that this was more than a bear market rally. The new weekly high in the NYSE A/D line this week was an additional sign that the NYSE can also surpass the early 2020 high at 14,183.
Does that mean that I think investors should jump into the market at current levels? My strategies for investors as well as traders are always based on my analysis of the risk versus the reward. That is the key criteria for investors as well as swing traders. With the decline in the S&P 500-tracking Spyder Trust on May 14 (point 1), there was enough evidence to suggest that the rebound from the lows was likely over.
Just six days later, the weakness had been resolved, but SPY had already closed 8.2% above the May 14 lows. This required a move in the SPY to $368.32 for a favorable reward versus risk profile which I did not think was possible at that point. Even with this week’s action, that level is still 15.5% above Friday’s close.
One thing is clear: markets do not move either higher or lower without interruptions or corrections in the trend. The longer the market moves in a direction, the more likely some sort of correction becomes. With the S&P 500 setting a new record for a 50-day gain last week, a correction has become increasingly likely.
While we have been in a bull market since 2009, corrections have been frequent. In 2019, SPY had a 7.4% correction in May, a 6.7% drop in August, and a 5.4% correction in October. In 2010-11, we saw larger corrections that interrupted the bullish trend: a 16% correction in 2010 and a decline of 19.4% in 2011.
The daily chart of the SPY shows that it moved above its starc+ band and the monthly pivot resistance at $316.44 on Friday (point 2). There is a band of further resistance in the $332-$336.80 area. The rising 20-day exponential moving average (EMA) is at $300.40, which is 6.2% below Friday’s close.
The close last week was 7.9% above the 20-week EMA at $293.87, and the weekly chart (not shown) shows no signs yet of a top. The daily S&P 500 A/D line is rising sharply and is well above its strongly rising WMA. This typically indicates that any pullback over the near term is likely to be brief unless the market receives a shock. As we head into the summer, I am still looking for at least a 5-10% correction where investors should have the ability to keep risk well under 5%.
Given last week’s large protest marches and the lack of social distancing in many states that have already opened, I am still concerned about another surge in COVID-19 cases. I will feel better about the future economic impact of the coronavirus if there is no surge by the end of June.
Interest rates did turn higher last week as well. The weekly MACD and MACD Histogram turned positive. I pointed out this potential out two weeks ago. Once above 1%, there is further resistance at 1.283% (line b) and then additional resistance at 1.461% (line a).
There is an FOMC meeting next week, with their formal announcement of policy on Wednesday afternoon, followed by Fed Chair Powell’s press conference. There are also the CPI and PPI reports next week, along with the mid-month reading on Consumer Sentiment on Friday. Consumer Sentiment is likely to be better than expected.
There have been some signs of sector rotation in the past few weeks, with some of the high-performing sectors seeing a middling performance, and some of the more beaten-down sectors on the rise. This has created some good trading opportunities. Similarly, not all stocks move with the indices, so there are often some new trading opportunities in stocks.
Don’t let this week’s positive market cause you to throw caution to the wind. I’ll personally be very reluctant to establish new long-term positions before the oncoming correction. In establishing positions before that, I recommend raising stops with prices to lock in profits when you get them.
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