Indices Surge Off a Great Setup as Rotation Resumes

MARKET SUMMARY

- Indices surge off a great setup as rotation resumes. What's not to like? Volume, and particularly breadth.
- Jobs are 'just right' . . . for a dysfunctional economy and financial markets.
- Low-pay jobs continue to dominate job creation as the US becomes a nation of full-time part-time workers. That's one way to solve the wage gap between the US and China.
- Consumer Credit is 94% student loans and auto loans.
- Greenspan tells the Fed to practice what he preached but never practiced himself.
- Market likely ready to continue the bounce, but big Fridays typically give some better entries the following Monday.

Stocks surge off of support.

What was not to like about Friday? Stocks drifted ahead of the jobs report, jumped on 175K jobs and a 7.6% reported unemployment rate as the 'just right' mix, and rallied to close at session highs.

SP500 20.82, 1.28%
NASDAQ 45.17, 1.32%
DJ30 207.50, 1.38%
SP400 0.94%
RUTX 0.83%

Again, what was not to like?

Perhaps . . . volume as trade faded to below average on NASDAQ and to average on NYSE. To be fair, volume levitated to above average the past few weeks, so a drop off is not fatal. Just so happens it was on the second biggest up day of the year, however, so it was no ringing endorsement of the move.

Perhaps . . . breadth? Just shy of 2:1 on both NASDAQ and NYSE. Hardly commensurate with the price move. INDEED, breadth was better on the Thursday reversal session (3:1 NYSE) when breadth tends to lag the market move.

These numbers suggest the session was not quite as strong as the gushing financial stations would have you believe.

Don't misunderstand. A good setup yielded a big upside gain. Stocks gapped upside, rallied, held the move from midmorning to the last hour, then rallied to the close. GOOG, PCLN, and AMZN all posted good moves with AMZN blasting out of a triangle base.

The break higher by leaders is important. Money left some stocks the past week but was not rotating into other areas as it was previously when the market continued to renew itself and continue the rally. Friday showed a resumption of rotation out some areas and into new, e.g. personal products to internet (WWWW, BIDU, SOHU).

Rotation is a positive. A big jump off of the same support that held in past dips during this November run is a positive. Indeed, it is likely enough to pull more money into the stock market.

At the same time, don't completely forget about or discount the weak market internals. A few stocks were up big. Most stocks either were not up big or were not up. In short, the outsized gains Friday don't necessarily require a further move higher next week given fewer participants in terms of buyers and in terms of fewer stocks participating in the move.


The News: So what caused it?

Jobs get the nod as the catalyst, but without the sweet setup the move would not be as significant. Basically jobs at 175K but a rising unemployment rate at 7.6% is supposed to keep the Fed from any near term action. What it does, however, is keep the Fed on track for a rate hike in late summer/early fall.

Nonfarm Payrolls, May (8:30): 175K actual versus 159K expected, 149K prior (revised from 165K)

Nonfarm Private Payrolls, May (8:30): 178K actual versus 175K expected, 157K prior (revised from 176K)

Unemployment Rate, May (8:30): 7.6% actual versus 7.5% expected, 7.5% prior

Hourly Earnings, May (8:30): 0.0% actual versus 0.2% expected, 0.2% prior

Average Workweek, May (8:30): 34.5 actual versus 34.5 expected, 34.5 prior (revised from 34.4)


Three to four months down the road for the start of removing stimulus appears to be the right timetable for stocks, at least here in early summer. That likely changes as the new school year looms. It might change Monday given the internals noted above.
The irony is, the real unemployment rate, when using historical workforce participation average rates over decades (65.8% versus the current 63.4%) is 11.3%! The Fed is talking about an improving economy but the numbers used to gauge improvement have been 'dumbed down' to the current woeful economy. By any historical standards unemployment is at a crushing 10+% but because the government adjusts every other statistic only when benchmark changes accentuate the positives, it is not about to calculate unemployment based upon historical participation rates.

Further, the rise in the unemployment rate to 7.6% was the result of rising sentiment and confidence as reported this past week. More people feel better about the economy and went look for work. But there are not enough jobs and frankly, not many good jobs.

Quantity over quality.

We created more jobs (175K) but the average hourly wage was flat versus a 0.2% expected gain. Once more you see the jobs created remain low-end with a large percentage being part-time.

Time quality: Part-time is on a big upswing. A new record at 2.68M temporary staffing jobs as 25,600 such jobs were added. Over the last four months temporary jobs are up just under 100,000, second only to restaurants. Historically temporary jobs peak when the economy peaks given tight labor markets. Hardly the case right now, at least in terms of the jobs market. Maybe the economy is topping out, but jobs are still lagging.

The key is what we have discussed before: the sweeping change of our workforce makeup in response to the sweeping change of the 'affordable healthcare act.' Investor's Business Daily picked up on this discussion this weekend.

Pay Quality: 55% of jobs created in May came from sectors paying below average wages: retail and hospitality. Given the bulk of jobs came from this group, the average wage limped in at $23.89. Over the past 12 months average hourly wages are up 2%. In the 10 months prior to the recession that started in 12/07 gains averaged 3.5%.

The jobs creators and what they pay:
Leisure and Hospitality: 43K jobs at an average pay of $13.45/hour.
Retailers: 27.7K jobs at $16.63/hour.
Temporary help: 25.6K jobs at $15.74/hour.

Again, almost 100K of the 175K jobs produced are in the lowest pay categories.

The lagging jobs groups and what they pay:
Construction: 7K jobs at $26.06/hour
Manufacturing: -8K jobs. Average wage $24.22/hour.

As we have detailed the past year, the jobs created are in the lower pay areas. The economy is STILL LOSING JOBS in some of the HIGHER PAY categories.

The piece de resistance: 21% of jobs lost in the recession were in occupations paying hourly wages of $13.83 or less. In the 'recovery,' those low pay occupations account for 58% of the jobs created. Today I heard a White House official touting 7 million jobs created in this administration.

Harken back to the Milton Friedman story where he was shown a works project where thousands of workers were using shovels to dig a canal. Friedman asked why they were not using earth moving machinery to which the communist official replied 'because using shovels creates more jobs.' Milton responded 'why not have them use spoons?'


Man, if we had some spoons we could REALLY make some progress . . .

The Friedman story is a twist of the current situation but it underscores that creating crappy, low paying jobs is no substitute for real investment and invention that creates real industry and economic activity and thus new inventions and cutting edge jobs that RAISE the standard of living. Indeed, this data clearly shows our standard of living is declining as we replace good jobs with low paying jobs.


A renaissance underway?

I heard one economist again mention the manufacturing 'renaissance' underway . . . as the regional manufacturing reports outside of Chicago are all negative, the national ISM is contracting, and manufacturing lost another 8K jobs, the third straight month of losses. Renaissance? Not in terms of jobs. Manufacturing has had to retool to meet competition from China and elsewhere.



The GRAND IRONY: we complain of China's low-cost labor force but the 'solution' we have come up with is a system that rewards job creators if they create part-time, lower pay jobs. In essence, we are 'dumbing-down' our workforce pay, moving toward China. Hell of a way to compete.

In any event, at the current rate it will take another 6 years to get the unemployment rate down to 5%. Longer if you compare apples to apples, i.e. using historical participation rates versus the artificially ones in place now.


Consumer Credit, April (15:00): $11.1B actual versus $13.2B expected, $8.4B prior (revised from $8.0B)



Very significantly, 94% of the credit was for school loans and auto loans. Just 6% was revolving, or credit card spending. At least that reversed a -0.9B March drop, but it shows not a load of confidence in terms of using credit. On the other hand, perhaps people now don't HAVE TO use their credit cards to survive as they did before. Maybe.


Weekend humor. In a sad way: Greenspan appeared on CNBC and seems to think that he was a putz in terms of easy rates compared to this Fed. Friday Greenspan said the Fed needs to go ahead and exit its QE program because the current Fed's 'maybe we will exit at some point in some amount when some trigger occurs' approach is holding the market back as investors are concerned about interest rate rises of uncertain amounts. After all, look at the volatility in the bond yields just on this last round of the Fed pondering what to do.



Greenspan suggests to get it over already and let the market make that decision. This fits his theories on rate hikes and cuts (i.e. the market factoring in the end point of the Fed move once the Fed announces a rate move program), but ironically, Greenspan NEVER put his theories into practice. Instead Greenspan would keep the market guessing, indeed appearing to take delight in the mystery, if another rate cut was coming and thus putting off investment just in case another rate cut was on the way. A little pot calling the kettle black.

Of course you have to factor in what the current chairman has to work with: a horrid fiscal and regulatory policy that is anti-growth. Bernanke is trying to do it all by himself.

Also factor in that Mr. Greenspan is still in denial his next to nothing interest rates had anything to do with the housing bubble and resultant crash that also gave Bernanke a short rope to work with.


Yes I am this much smart.

Of course Greenspan's remarks implicitly assume the economy in its current state CAN sustain itself and thus stock prices. It can . . . likely at zero growth rates just as they are now, along with some of that monthly Fed stimulus. Greenspan is correct, however, in that the market did buck like a bronco when the Fed recently once again discussed tapering. The bond market sold off and rates shot up. Kind of like Friday.


MARKETS:

OTHER MARKETS
Dollar was basically flat: 1.3224 versus 1.3224. Tested the 200 day SMA again and bounced again. Dollar should rally on Fed taper, stronger economy. Hmmm. It is still higher than it was to start the year, but quite a dive of late EVEN WITH the Fed talking of tapering, a move that SHOULD increase the dollar's value.

Bonds tumbled: 2.15% versus 2.08% 10 year. New closing low on this move. The 10 day EMA stopped it.

Oil surged: 96.03, +1.27. With all of that great US economic activity surely more oil will be required.

Gold was pounded: 1383.00, -32.70. Sharp turn lower from the 20 day EMA after just breaking over it Thursday. Ironic given the supposed reason stocks rallied was because the Fed was going to continue $85B/month in bond purchases.



TECHNICAL SUMMARY

NASDAQ
Stats: +45.16 points (+1.32%) to close at 3469.21
Volume: 1.63B (-8.12%)

Up Volume: 1.17B (-120M)
Down Volume: 445.35M (-45.92M)

A/D and Hi/Lo: Advancers led 1.87 to 1
Previous Session: Advancers led 2.38 to 1

New Highs: 128 (+57)
New Lows: 26 (0)

S&P
Stats: +20.82 points (+1.28%) to close at 1643.38
NYSE Volume: 642M (-5.45%)

A/D and Hi/Lo: Advancers led 1.98 to 1
Previous Session: Advancers led 3.1 to 1

New Highs: 135 (+78)
New Lows: 108 (-34)

DJ30
Stats: +207.5 points (+1.38%) to close at 15248.12

Volume: Significant volume drop on an upside session. Below average on NASDAQ and just average on NYSE. Not commensurate with a surge upside, but you can also argue volume was solid Thursday when the indices reversed off the selling.

Breadth: Pretty lousy, below 2:1 and not even as good as the Thursday reversal session (2.4:1 NASDAQ and 3:1 NYSE).


THE CHARTS:

SP500/DJ30. Bounced off the Thursday reversal from an undercut of the 50 day EMA. Acting just as if QE was here to stay. Now we see if they can parlay the reversal and initial bounce into another run up to the top of the range.

NASDAQ. Nicely done with the Thursday reversal at the November trendline that established an ABCD pattern. Gapped and ran though on below average volume. That trade is a bit worrisome as NASDAQ moves back up to take on the May post-bear market highs.

SP400. Reversed from the 50 day EMA breach on Wednesday, gapped upside Friday. Nice little ABCD of its own. A market leader late in the week.

RUTX. Held the 50 day EMA Wednesday, bounced Thursday, added upside Friday. Really took the lead late in the week though not on Friday. It was not a small cap day as the breadth suggested. Solid, just not leading the move Friday. Given the weak Friday breadth, really watch how the small caps perform this coming week.

SOX. Held the 20 day EMA last week, reversing Thursday with a doji. Good upside break Friday, but right back in the fight with the 2011 resistance it broke but then could not hold. Important group this coming week.


LEADERSHIP:

Rotation looked to start up again but it was a narrow group receiving the money.

Upside: Chinese internet and US internet: BIDU, SOHU, WWWW.

Retail still looks good in particular areas: PCLN, AMZN, TJX, KORS.

Electronics is interesting: FEIC broke higher again. LEDS continues to tantalize.

Drugs: Trying to recover but did some damage. CELG, GILD, TSRO.


Downside or still struggling:

Personal Products: CL, PG


Maybe ready to bounce: Utilities. DJ-15, AEP.



THE MARKET

SENTIMENT INDICATORS

VIX: 15.14; -1.49
VXN: 15.88; -1.52
VXO: 14.59; -2.23

Put/Call Ratio (CBOE): 1.13; -0.09


Bulls versus Bears

So often the case: bulls plunged to 45.8% from 52.1% JUST as the market pulled back and bottomed, showing exellent price aciton. Bears were as usual less volatile, but they rose to 20.8%, also believing the market was primed to fall . . . as if fell. As noted last week, the levels hit points where the market would pull back, BUT it was ALREADY in the pullback.



Bulls: 45.8% versus 52.1% versus 54.2% versus 52.1% versus 47.9% versus 44.3% versus 47.4% versus 50.5% versus 52.0% versus 49.5% versus 47.4% versus 50.00% versus 44.2% versus 46.3% versus 48.4% versus 52.6% versus 54.7% versus 54.3% versus 53.2% versus 51.1% versus 47.8% versus 46.8% versus 45.7% versus 43.6% versus 39.3% versus 37.2% versus 38.3% versus 43.6.

Background: Undercut 35%, the threshold for bullishness, in early June. As noted, hit 34% in early June. It did its job and the market is on the rally. Hard drop to 34 from 39.3% as economic reality and a choppy stock market hit. Off the 55+ level hit in late February. That was the highest level since April and May of 2011, the peak of the post-bear market high. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 20.8% versus 19.8% versus 19.8% versus 19.8% versus 18.8% versus 19.6% versus 20.6% versus 20.6% versus 19.4% versus 19.6% versus 18.6% versus 18.8% versus 21.1% versus 21.1% versus 22.1% versus 21.1% versus 21.1% versus 22.3% versus 22.3% versus 23.4% versus 24.5% versus 24.5% versus 23.4% versus 25.5% versus 27.7% versus 27.7% versus 28.7% versus 27.7%.

Summary: Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


MONDAY

Friday we picked up some upside positions, e.g. AMZN, but the gaps higher kept us out of the index plays and other plays. We were not going to chase a big gap and run with a lot of new positions ahead of the weekend when there is so much jawboning around the possible Fed actions. When we saw the breadth numbers and the volume, there was even less reason to dive in.

Moreover, while the indices surged, as noted above, many stocks were just so-so. There were not a plethora of 'gotta' have this one' buys Friday. Indeed, I really was not that wild about buying a surge on Friday in the first place. Many times after such a big surge, particularly on some weaker breadth and volume, some weakness to start next week provides opportunity to pick up some positions on those stocks that gapped and ran away Friday.

Typically works that way and that will be the focus: picking up good stocks on a test . . . as long as the test holds and bounces. The internals raise some questions that will need to be resolved, but they really don't overshadow the setup and then bounce the overall market showed. If stocks test the move, hold and then bounce, it wouldn't be that wise to parse the internals too much and worry. Play good, leadership quality stocks and you come out in great shape.


Support and resistance

NASDAQ: Closed at 3469.22

Resistance:
3503 is the upper channel line for the November 2012 to present uptrend
3521 is the August 2000 low.
3532 is the early May high

Support:
3407 is the November 2012 up trendline
3401 is the May 2000 closing low
3371 is the early May 2013 upper gap point
The 50 day EMA at 3373
3321 from April 2000
The 2011 up trendline at 3236
3227 is the April 2000 intraday low
3197 is the September 2012 post-bear market high
3171 is the October intraday high
The 200 day SMA at 3157
3134 is the March 2012 post-bear market peak
3130 from some January 2013 lows
3104-3112 from August and mid-October peaks.
3101 is the August 2012 high
3090 is the mid-March interim high
3076 is the late April 2012 high and the 1/2013 low after gapping higher
3062 is the December 2012 prior peak
3042 from 5/2000 low and several other price points
3024 is the gap point from early May
3000 is the February 2012 post-bear market high
2999 is the bottom of the August 2012 consolidation
2988 is the July 2012 high
2977 to 2980 is the bottom of the late October 2012 consolidation, July 2012 peak
2962 is the April 2012 low
2950 is the mid-April closing low


S&P 500: Closed at 1643.38

Resistance:
1687 is the May high and post-bear market high
1702 is the upper trendline in the channel

Support:
The November up trendline at 1634
The 50 day EMA at 16010
1598 is the April 2013 high and former all-time high
1576 from October 2007, the prior all-time high
1556 from July 2007
1541 is the April 2013 closing low in that pullback inside the uptrend
1539 from June 2007
1531 is the recent high
1499 from January 2008
The 200 day SMA at 1495
1475 is the September 2012 high
1471 is the October 2012 intraday high
1466 is the September 2012 closing peak and rally closing high
1440 from November 2007 closing lows
1434 from early November 2012
1433 from August 2007 closing lows
1427 is the August 2012 peak
1425 from May 2008 closing highs and the October 2012 low
1408 is the late October 2012 range closing low
1406 is the early May 2012 peak
1402.22 - 1400 is the closing low of the August 2012 lateral consolidation


Dow: Closed at 15,248.12

Resistance:
15,542 is the May 2013 high
15,734 is the upper channel line for the trend off the November low.

Support:
The November up trendline at 15,172
The 50 day EMA at 14,936
14,888 is the April peak and prior all-time high
14,198 from the October 2007 high
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation
The 200 day SMA at 13,865
13,784 is the late February 2013 closing low
13,692 from 6-2007 peak
13,668 from 12-2007 peak
13662 is the October 2012 intraday high
13,653 is the September 2012 high
13,557 to 13,662
13,413 from the late September 2012 low
13,300 to 13,331 is the August 2012 post-bear market high
13,297 is the April 2012, prior post bear market high
13,058 from the May 2008 peak on that bounce in the selling
13,056 is the February 2012 high
12,716 is the April 2012 closing low
12,524 is a range of support from early 2012 and summertime 2012


Economic Calendar

June 3 - Monday
ISM Index, May (10:00): 49.0 actual versus 50.9 expected, 50.7 prior
Construction Spending, April (10:00): 0.4% actual versus 1.1% expected, -0.8% prior (revised from -1.7%)
Auto Sales, May (14:00): 5.1M prior
Truck Sales, May (14:00): 6.8M prior

June 4 - Tuesday
Trade Balance, April (8:30): -$40.3B actual versus -$41.0B expected, -$37.1B prior (revised from -$38.8B)

June 5 - Wednesday
MBA Mortgage Index, 06/01 (7:00): -11.5% actual versus -8.8% prior
ADP Employment Change, May (8:15): 135K actual versus 157K expected, 113K prior (revised from 119K)
Productivity-Rev., Q1 (8:30): 0.5% actual versus 0.5% expected, 0.7% prior
Unit Labor Costs, Q1 (8:30): -4.3% actual versus 0.6% expected, 0.5% prior
Factory Orders, April (10:00): 1.0% actual versus 1.6% expected, -4.7% prior (revised from -4.9%)
ISM Services, May (10:00): 53.7 actual versus 53.5 expected, 53.1 prior
Crude Inventories, 06/01 (10:30): -6.267M actual versus 3.0M prior

June 6 - Thursday
Challenger Job Cuts, May (7:30): -41.2% actual versus -6.0% prior
Initial Claims, 06/01 (8:30): 346K actual versus 348K expected, 357K prior (revised from 354K)
Continuing Claims, 05/25 (8:30): 2952K actual versus 2980K expected, 3004K prior (revised from 2986K)
Natural Gas Inventor, 06/01 (10:30): 111 bcf actual versus 88 bcf prior

June 7 - Friday
Nonfarm Payrolls, May (8:30): 175K actual versus 159K expected, 149K prior (revised from 165K)
Nonfarm Private Payrolls, May (8:30): 178K actual versus 175K expected, 157K prior (revised from 176K)
Unemployment Rate, May (8:30): 7.6% actual versus 7.5% expected, 7.5% prior
Hourly Earnings, May (8:30): 0.0% actual versus 0.2% expected, 0.2% prior
Average Workweek, May (8:30): 34.5 actual versus 34.5 expected, 34.5 prior (revised from 34.4)
Consumer Credit, April (15:00): $11.1B actual versus $13.2B expected, $8.4B prior (revised from $8.0B)

June 11 - Tuesday
Wholesale Inventories, April (10:00): 0.2% expected, 0.4% prior

June 12 - Wednesday
MBA Mortgage Index, 06/08 (7:00): -11.5% prior
Crude Inventories, 06/08 (10:30): -6.267M prior
Treasury Budget, May (14:00): -$139.0B expected, -$124.6B prior

June 13 - Thursday
Initial Claims, 06/08 (8:30): 345K expected, 346K prior
Continuing Claims, 06/01 (8:30): 2973K expected, 2952K prior
Retail Sales, May (8:30): 0.3% expected, 0.1% prior
Retail Sales ex-auto, May (8:30): 0.3% expected, -0.2% prior (revised from -0.1%)
Export Prices ex-ag., May (8:30): -0.5% prior
Import Prices ex-oil, May (8:30): -0.2% prior
Business Inventories, April (10:00): 0.2% expected, 0.0% prior
Natural Gas Inventories, 06/08 (10:30): 111 bcf prior

June 14 - Friday
PPI, May (8:30): 0.1% expected, -0.7% prior
Core PPI, May (8:30): 0.1% expected, 0.1% prior
Current Account Balance, Q1 (8:30): -$111.5B expected, -$110.4B prior
Industrial Production, May (9:15): 0.1% expected, -0.5% prior
Capacity Utilization, May (9:15): 77.8% expected, 77.8% prior
Michigan Sentiment, June (9:55): 83.0 expected, 84.5 prior

By: Jon Johnson, Editor
Copyright 2013 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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