On Friday the January Employment report revealed a net increase of 113k jobs for the month, well below the 175k-185k consensus. However the buyers came out right from the opening bell, negating the Monday sell-off, marking the first positive weekly close since the beginning of the year. Seeming to suggest that slow growth is still better than no growth at all.
In all reality though, from a macro point of view the stock market was oversold in the short term and due for a retracement. The VIX hit the 20 level which in recent history has been a buy signal (as depicted on the chart above) and the S+P 500 had nearly reached a 125 point correction which would have matched the size of the biggest sell off for 2013.
The major question now becomes whether this is just a short squeeze or the beginning of yet another leg up in this “long in the tooth” bull market. The chart above shows the short term demand pattern which was finally broken on Friday. Each retracement had taken the S+P 500 up 30 handles approximately. Friday’s rally broke that pattern and created the “squeeze” we saw throughout the day.
The next likely destination now would be a retracement rally that nears the length of the previous, that being the December low into the all time high at 1850 (as depicted on the above chart). From Monday’s low that projects resistance at 1815-1820. This would be my line in the sand, strength above would mean the S+P 500 would be headed well above 1900. However as long as we remain below, the odds favor a continued correction, possibly into long term support as described in this prior post.
As for the Dow, it has a little further upside to go to reach it’s projected resistance (chart above). Same rules apply, below resistance and odds favor further correction. Strength above resistance likely means the Dow is headed above 17,000.
Sector performance year to date still shows risk aversion as Utilities and Health Care continue to show relative strength while Energy, Staples and Cyclical sectors show weakness.
Asset class performance also continues to drive home the risk aversion theme but the spread begins to narrow after Thursday and Friday’s performance.
The trend matrix continues to show a moderately bullish theme. Only real changes were Consumer Staples turning Neutral from Bearish and Technology turning Bullish from Neutral.