Friday the market was shocked by the
unemployment news. I don't think anyone
expected such bad numbers. Instead
Canada actually created more jobs than
the United States. Considering that the
"rumor" was that the numbers would be
over 100,000 newly employed, the market
actually held up pretty well.
Still though, there is no other word for
it - shocker!
The market opened down and proceeded to
fall until around 11:15 AM and then the
pullback seemed to run out of steam. Why
was that? Could it be the rumor that
Alcoa Inc. (AA) earnings will be better
than expected. Those earnings come out
Monday.
In the chart below you can see the action. The
market rebounded and kept grinding higher and
surprisingly there was no selling into the close. So
what does all this tell us?
Well one thing is for certain, there is strength in
the market. The recent run up in stocks was no
fluke, but actual investors buying back into stocks.
They were in treasuries as they worried about
the Greek Debt Crisis and then they moved quickly
back into stocks when the Greek debt crisis looked
like it was being kicked down the road.
It's important to understand that while buy and hold
investors don't normally worry about day to day
swings in the markets, hedge funds, institutional
managers, mutual fund managers, pension managers,
and traders do watch the market. They want to be in
on any rise and out before any fall. The selling on
Friday morning was muted which tells me that the
bull remains in charge for now.
On Thursday the NASDAQ moved within "inches" of
reaching the all time high of 2007. It is the only
US index to do so.
Below you can see the NASDAQ high back in October
2007. From there the market sold off, it made two
tops which you can see and then commenced moving
lower as the bear market took a bigger hold of
stocks in general.
Thursday's move though to within reach of setting a
new high for the past 10 years is important. The
NASDAQ led the market recovery after the disastrous
crash in 2008 and 2009. On Friday the XLF pulled
back again BUT it is still above $15.00. The reason
the market is so worried about the financials is
because as you can see from the 5 year chart, $15.00
is sort of the line in the sand. If the financials
collapse below $15.00 and stay there, it could spell
the end to the bull market. Sure the market could
rally for a bit longer, but if the financials fall
below $15.00 and move even lower, then it is just a
matter of weeks before the market will pull back
seriously.
So while the financials have not helped out the
market much, it hasn't really mattered as it has
been the NASDAQ that has lead the recovery rally,
every step of the way. You can see this in the chart
below where I have tried to superimpose the S&P 500
on the NASDAQ chart.. Therefore it is important to
keep watching the NASDAQ. I believe wherever the
NASDAQ goes, the S&P 500 will follow.
Next week therefore is crucial. If the earnings
season shows decent earnings and once again
companies manage to beat analysts earnings
projection, I believe the July Rally will remain
intact. That doesn't mean to say the market will
shoot up this week. I actually kind of doubt that.
What I do think though is the market will not sell
off. It will probably be weak but with no real
concerns of any major downturn.
If though earnings do not beat expectations,
starting on Monday with Alcoa, then the market could
be in for some summer heat over the remainder of
July - pardon the pun.
Remember these market direction calls are all
"best guess". I do not believe anyone knows for
certain what direction the market may take and as
was just witnessed at the end of June, a market that
looked like it was really going to get nasty, turned
right around and made one of the best rallies of the
past few decades. For me though, I plan to keep a
watchful eye on the NASDAQ..
