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Golidocks jobs report triggers rally. Now what?

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The stock market reacted positively to the strong jobs report on Friday that saw the largest monthly gain in jobs in almost two years. At the same time wage growth came in slightly lower than expected easing inflation concerns. The Dow jumped 441-points on the day ending a big week on Wall Street.
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The concern for investors recently was the possibility of an overheated economy and inflation hitting levels that could send interest rates higher faster than anticipated, but the Goldilocks jobs report eased those concerns, at least for a day or until the next wave of data comes in. The Fed meets next week to determine the next move on interest rates so each economic report in the interim could be a market mover, even though it is highly expected that we will get a 25 basis point increase in the Fed Funds Rate. The questions is always, what come next?

Historically a big market move to a surprise in the jobs report of +/- 50,000 or more above or below estimates, like we saw on Friday, has a tendency to reverse within a few days, but I'm talking years of historical examples but as we know, recent history has mocked market tendencies. Perhaps the recent, previously elusive, 10% correction means we will see more "normal" or typical reactions going forward rather then the post 2106 election anomalous market reactions. We'll find out.

The S&P 500 / C-fund gapped up on Friday and as we talk about often, open gaps on the S&P 500 chart are rare and don't tend to stay open very long. The exception has been the breakaway type gap that starts an explosive rally. They tend to come off market lows and this one doesn't really qualify since we're about 4-weeks off the market low now. The PMO indicator is giving a crossover buy signal after a false crossover last month, and that can be a good sign for stocks.

The weekly chart shows the big move for stocks last week but the rally is now testing resistance and if this does turn out to be a bear flag (in red) then we could see the market struggle here.

The small caps / S-fund blasted through another level of resistance on Friday and what was looking like a bear flag is starting to head toward the old highs, and that is not what a bear flag would do. I would be surprised if this went straight up from here since volatility seems to be different this year compared to last year.

The Dow Transportation Index was one of the worst looking charts heading into Friday so that rally really changed things. You can see the next levels of resistance on the chart but before Friday we were talking above support lines failing and bear flags, and not overhead resistance. Still, this does look like a big bear flag even though the smaller bear flag evaporated.

The EAFE Index / I-fund was up modestly on Friday but there are still some questions with this chart. A move above the blue descending line would help, but it too is still within a larger bear flag.

The AGG (bonds / F-fund) remains in a bear flag and has consolidated for quite a while now. These formations tend to break down but this flag is taking an awfully long time to form so many there is some support here? But a flag is a flag and it's one of the strongest formations so I wouldn't bet against it yet.

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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley

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