Jobs report not as rosy for E-minis as it appears

Good day! For weeks now we've been seeing more and more people conclude one thing: This market is overbought! It seems like a simple statement with a simple conclusion. If the market is overbought, then surely we should see a correction! Right? If you've been reading this column for the past month, then you know that I've been keeping a furtive eye out for such a development since sometime around the start of October. After all, in the past we've seen many weekly corrections begin in the month of October.

This time around was a bit more exceptional, however. The elections were right around the corner, the market was antsy to see what the Fed had planned, and the housing and jobs data remain dismal. Although I haven't positioned myself short (other than intraday) or gotten into the "it HAS to fall" mindset, it has certainly left me shying away from aggressive upside action on the larger time frames. Did I miss out on some gains? Sure, but that happens to every trader, every day. This didn't keep me out of the markets though. It merely shifted my focus towards intraday momentum plays. And there have been plenty of strong intraday movers in this market, particularly in the morning.

Dow Jones Industrial Average (Figure 1)

The market had rallied on Wednesday following the FOMC's report on interest rates and its plans for quantitative easing 2 ($600 billion in $75 increments until next summer), resulting in a very strong showing on Thursday. All three of the major indices broke the upper end of the uptrend channel from the prior several weeks with the opening gap coming out of this move and that buying pressure continued out of the open on Thursday. From mid-morning onward, however, the indices congested as they corrected from the extreme upside move. The Nasdaq weakened against the S&P 500 and Dow Jones Ind. Average, but held its ground overall. Meanwhile the S&Ps and Dow began to break higher into Thursday's close. It was only the S&P 500, however, that saw significant follow-through into Friday.

It was news that bolstered these gains in the S&P 500 on Friday morning. The strongest performer in the index was on Friday was Massey Energy (MEE). It rose 11.2% on word that it was weighing a takeover offer by Alpha Natural Resources (ANR). Fluor (FLR) followed on the leader's board with a gain of 9.5% after it expanded its buyback program and increased its 2011 guidance.

Although a number of individual stocks caught the market's attention, when we drop down and look at the price action on Friday, most of the eyes were on the latest employment data. The index futures popped in premarket trade immediately following the data. On the surface, the numbers were exciting. Nonfarm payrolls not only beat estimates when the numbers came in showing a 151,000 increase in the total number of jobs in October, it was more than double consensus estimates. Additionally, the jobs growth for the previous two months was revised higher by 110,000 and the workweek crept up from 34.2 hours in September to 34.3.

The data underneath the headlining numbers, however, was not worth cheering. Most of the gains were in only a couple of sectors, while those that entailed good-producing employment barely rose and manufacturing, construction, transportation, information, finance, and government all felt losses. To paint an even clearer picture: The employment-to-population rate, which measures the share of the population that is actually working, fell from 58.4% to 58.3%. This is a 10-month low.

S&P 500 (Figure 2)



The rest of the details are almost universally as grim. The U6 index, which includes the underemployed, remained high at 17%, while those looking for work for more than 6 months rose 1.54% last month and the median (21.2 weeks) and mean (33.9 weeks) durations for unemployment both increased. All-in-all, hardly much worth cheering about. With this in mind, Friday's poor overall performance comes more into perspective. It was a difficult day for the indices and even many of the purely intraday traders I spoke with had a hard time with it. Although the volume was decent compared to recent weeks, the action was choppy and less predictable.

Nasdaq Composite (Figure 3)

The Dow Jones Industrial Average ($DJI) had a gain of 9.24 points, or 0.08%, and closed at 11,444.08 on Friday. The top percentage gainers in the Dow were Alcoa Inc. (AA) (+2.9%), JPMorgan Chase and Co. (JPM) (+2.9%), Walt Disney Co. (DIS) (+2.5%), and DuPont De Nemours and Co. (DD) (+2.4%). The top percentage losers were Merck & Co. (MRK) (-2.6%), Kraft Foods (KFT) (-2.2%), Pfizer (PFE) (-1.2%), and Microsoft Corp. (MSFT) (-1.1%). The Dow ended the week higher by 2.9%.

The S&P 500 ($SPX) rose 4.79 points, or 0.39%, and closed at 1,225.85. In addition to MEE and FLR, other notable gainers included D.R. Horton Inc. (DHI) (+9.7%) and Denbury Resources (DNR) (+6.7%). All 10 of the S&P's industry sectors advanced, led by the financials, energy, and materials. The weakest performer in the index was Whole Foods Market (WFMI), which gave back nearly 4% of its 15.1% gains from the previous session following earning (-3.8%). CBS Corp. (CBS) (-3.7%), Allergan Inc. (-3.6%), Marshall & Illsley Corp. (MI) (-3.5%), and Republic Services Inc. (RSG) (-3.0%) also led the decliners. The S&P 500 ended the week higher by 3.6%.

The Nasdaq Composite ($COMPX) ended the session higher by 1.64 points, or 0.06%, on Friday and it closed at 2,578.98. The strongest stocks in the Nasdaq-100 included Foster Wheeler (FWLT) (+8.41%), Symantec (SYMC) (+3.86%), Starbucks (SBUX) (+3.76%), and Electronic Arts Inc. (ERTS) (+3.09%). The weakest stocks were Activision Blizzard (ATVI) (-2.84%), Research In Motion (RIMM) (-2.54%), Garmin Ltd. (GRMN) (-2.17%), and Maxim Integrated Prods. (MXIM) (-2.16%). The overall Nasdaq Composite ended the week higher by 2.9%.

Although the focus of this column is typically upon the three major indices, other stand-outs for the week include a 4.8% gain in the Russell 2000, a 6.7% gain in crude oil prices, a 3% gain in gold, a 1% loss in the U.S. Dollar Index, and a 1.5% drop in the 10-yr. Treasury. On Friday interest rates did creep higher. The 10-yr Treasury yield rose from 2.48% on Thursday to 2.536%. Mortgage rates also inched up, while gold has has caught a lot of attention recently because it's been flirting with the $1,400 an ounce level. On Friday it came within just about a dollar of that psychological price point with an afterhours high of $1,398.70 an ounce. Intraday, it closed higher by $14.60 and settled at $1,397.70.

This week will be a lighter one on the economic front. Instead of the markets being led by the news, we're going to see the reaction to all of last week's headlines play out. The 2007 high in the Nasdaq is still serving as a magnet now that the S&P 500 has cleared its previous high (at least from an intraday perspective). I believe that this level will lead to a double top in the Nasdaq on the larger monthly time frame. The slightly higher high in the S&P 500 will instead have a higher chance of creating a 2T, which is a type of double top in which the higher high serves as a bull trap. The "big guys" will try to hold up the markets into the New Year with the desire to have something positive to show for the year, but this is going to be a struggle. Keep on your toes and remember that "not all that glitters is gold..."

Note: Unless otherwise stated, the index action described in this article relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.

Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.

About the Author
Toni Hansen

Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.

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