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Can stocks hold jobs report rally gains?

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A better than expected jobs report helped stocks to a fast start on Friday, and they hung on to close near the highs of the day with moderate gains in the broader indices. The Dow lagged a bit as its big winners on Thursday pulled back on Friday. It closed with a gain of 40-points, or 0.15%, while small caps led the way with a solid 0.82% gain.

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We talked about the win, win situation that stocks were in going into the jobs report so the rally wasn't much of a surprise, but the indicators are getting quite stretched and I wouldn't be surprised to see some profit taking early this week - barring any "grey swans" such as the usual trade deal headline or another dovish statement out of the Fed, etc.

Barron's has a dubious history of posting cover stories like the one below, just before things start to change. It's not always the case of course, but the bulls were cringing this weekend when they saw this cover.


Source: https://www.barrons.com


There was a study done on this and while there is some evidence to back up the validity of the Cover Story contrarian indicator, ironically they did not include Barron's as one those studied, despite it being the one most seem to talk about and most notorious for the phenomenon.

This week's economic data headlines will be the CPI report and the release of the FOMC meeting minutes on Wednesday, PPI on Thursday, and the Michigan Consumer Sentiment report on Friday. We still have another week before we start seeing some of the major companies reporting earnings, and the bulk of S&P 500 reports will start the following week so these economic reports may be the only catalysts in the short-term, save any of those grey (or maybe black) swans.

I'm not sure what kind of impact the Mexican border situation will have on stocks. There was concern after the President threatened to close the border, but now as an alternative they are talking about putting 25% tariffs on cars made in Mexico. Again, what this means for the the stock market, I'm not sure, but that's what's going on there.



The S&P 500 (C-fund) keeps nudging along and rising just below that rising resistance line (red) while some rising support (blue) is narrowing so something is going to have to give in the coming days. That support is the bottom of that blue dashed rising trading channel. After a temporary break below it in March, the S&P has recaptured that support, and that may be the technical argument for the bulls going forward. The bears may be focusing on the red resistance line and the open gap down by 2840, which about 2.5% below the current level.




The DWCPF (S-fund) closed right at the level it stalled at in February, but the consolidation in the interim has been constructive and made a nice looking right shoulder in that large inverted head and shoulders pattern.




The Dow Transportation Index pushed above the February high for a third straight day, but closed above it for the first time on Friday. The angle of incline during this recent rally has been too steep to retain, and it did break below it last week, but it is making higher highs.




I suppose the question is why? The jobs report may be indicating strength in the economy which helps the economically sensitive Transports, but I have to wonder why someone like FedEx, who sank sharply after reporting a disappointing earnings report and guidance in March, quickly turned around and is now priced higher than it was before their earnings report. It seems irrational unless something changed?




The AGG (Bonds / F-fund) seems to have stabilized after the recent pullback, although the gap is still open and could be a target.




The yield on the 10-year Treasury pulled back to fill that small open gap near 2.50%, but the problem here is that it also posted a negative outside reversal day, which tends to lead to more downside in the short-term. Are bond market strategists, generally considered more savvy than stocks market investors, looking for lower yields again? The trend is still down and of course if this heads lower we risk seeing it invert against the 3-month Treasury again. The stock market won't like that, but we'll see if I'm jumping the gun here.




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

Tom Crowley



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