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One Day Jobs Bounce Or End Of The Pullback?

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    June 9, 2013

    The S&P 500 had pulled back to the potential support at its 50-day m.a., which met the consensus forecast for just a brief pullback of 3 or 4%.

    And with the big rally yesterday it seems to have found the 50-day m.a. to be support again.


    Or could it be just the first half of a typical reaction to yesterday’s positive jobs report? With the negative ADP jobs report on Wednesday, the ‘whisper number’ for yesterday’s Labor Department report had been lowered significantly. So the positive report was a surprise.

    And as I said in Thursday’s blog:

    “For many years we have referred to the Labor Department report as The Big One! We do so because, although many hours and words are wasted on trying to predict its numbers, it is in fact not predictable. It comes in with a surprise in one direction or the other more often than any other set of numbers. And as a result it most often creates a one to three-day triple digit move by the Dow in one direction or the other.

    The other side of the pattern is that whatever is the original direction in reaction to the report is usually reversed over the subsequent few days, and the market returns to whatever was its focus prior to the report.”

    So was yesterday’s triple-digit rally day just the first half of that pattern with the second half to follow, or the end of the pullback and a bottom for a new leg up?

    Global market plunges continue.

    As shown in the weekly market performance table further down in this report, yesterday’s big rally in the U.S. and Europe in reaction to the jobs report, was enough to close the U.S. market fractionally positive for the week, the S&P 500 up 0.8% for the week.

    But the global market plunges continued. And they include the world’s largest economies behind the U.S. For instance, China, the world’s 2nd largest economy saw its market down 3.9% for the week, Japan, the world’s 3rd largest economy, down 6.5%, Brazil down 3.3%, Hong Kong down 3.7%, and so on.

    And none of them came close to finding their 50-day moving average to be support.


    The divergence with the U.S. market continues.

    Investor Sentiment.

    Sentiment as measured by Consensus Inc. (major brokerage firms and professional advisors); the Investors Intelligence Sentiment Index (investment newsletters); Market Vane (futures traders); the VIX Index (options traders), etc., tend to be fairly stable, rising or falling over fairly long periods, and often remaining close to peaks or troughs for weeks and months.

    But the poll of its members by the American Association of Individual Investors, tends to considerable volatility, usually reflecting whatever has happened in the market in the last one to three weeks.

    So while the AAII poll is also helpful in assessing risk (sentiment by all methods of measuring tends to be extremely bullish near market tops, and bearish at correction bottoms) the AAII poll is less useful, tending to jump back and forth a lot short-term between bullishness and bearishness when volatility comes into the market.

    For instance, in April after the market had been down for several weeks, the AAII poll showed 54.5% were bearish, only 19.3% bullish. A few weeks later, after a couple of weeks of rally, the poll reversed dramatically to only 21.6% bearish, and 48.9% bullish.

    Recently, as the market has demonstrated uncertainty, seesawing between rally days and weeks and correction days and weeks, that short-term activity also shows in the AAII poll. Two weeks ago it showed 35.97% bullish, 29.64% bearish. This past week it showed 29.47% bullish, 38.95% bearish, both readings pretty much neutral and uncertain.

    But maybe we should be looking at the AAII polls in a different manner, looking at changes taking place in what individual investors are doing rather than what they are saying.

    Because while by most measurements investor sentiment is at levels of high bullishness and confidence, the most recent AAII poll shows individual investors say they are not overly bullish or bearish.

    However, AAII also produces surveys of how its individual investor members have their assets allocated between stocks, bonds, and cash. And what they seem to be doing paints a different picture than what they are saying about their bullishness or bearishness.

    Here’s what AAII says about the current asset allocations of its members:

    “Equity allocations nearly hit a six-year high last month. . . . Cash allocations, meanwhile, fell to a level not seen since 2010. . . . Stock and stock fund allocations rose 3.5 percentage points to 65.2%. . . . . This was the largest allocation to equities since September 2007.”

    Whoops. On average, investors had been pulling money out of stocks and equity mutual funds throughout the bull market that began in 2009, and just began pouring money back into the market late last year, and have continued to do so as the rally off the November low has been so impressive.

    And now the AAII says that last month its members already had the largest allocation to stocks and equity mutual funds since September, 2007 (which was a month before the 2003-2007 bull market topped out)?

    So perhaps the sentiment of AAII members is not as much out of synch with other measurements of investors sentiment as its weekly poll of what its members say about their bullishness and bearishness seems to indicate.

    Other Voices.

    Financial Times: “Bill Gross [founder of PIMCO’s giant bond fund] is not so alarmed about bonds. He says higher yields are still a year or two away as the global economy is still struggling to grow, so official interest rates are likely to remain low. So while two years ago he shunned US government debt, he has now poured it into his bond fund as one of the least-worst assets to own in a financial world full of bubbles.”

    Michael Feroli, J.P. Morgan Chase: “Adding it all up, today’s employment report has a little something for everyone. If the last week or two of soggy data generated renewed fears, today’s report should help to mollify those concerns.”

    Comstock Partners: The recent return of high volatility to the stock market, bond market and currencies suggest the end of the rally that started in November and probably to the upsurge since the March 2009 bottom.  The market now appears to be entering a lose-lose situation where economic growth is bad since it forces the Fed to “taper’ its bond buying program, a move that investors, as they have most emphatically demonstrated this week, do not like one bit.  On the other hand, if the economy continues its tepid pace (or worse), as we think it will, employment won’t meet the Fed’s goals, and earnings will take a dive.  In the latter case, the Fed would likely delay tapering of its bond-buying program and investors will interpret bad news on the economy for what it is—-bad news.”

    Business Insiders: “Shares of companies highly sensitive to interest rates, including homebuilders and real estate investment trusts, have been hit especially hard. But most stocks have moved lower since May 22, when the advance-decline line for S&P 1500 stocks peaked.”

    The Economist: “The protracted weakness especially in southern Europe is inflicting social misery. Unemployment reached 12.2% of the workforce in the euro area in April, and is around 27% in Greece and Spain and close to 18% in Portugal. Such high rates of joblessness are politically perilous, too. But what is most corrosive of all is loss of hope as the lost decade continues.”

    The Globe and Mail (Canada): “Market forecast: Bullish, with a chance of disaster. Stocks have rebounded from the worst downturn of the year, but there is no indication that the concerns hanging over the market have suddenly cleared. Most of the attention is centered on the S&P 500, which hit a record intraday high on May 22 but then slumped more than 5 per cent in just 11 trading days. That’s not exactly market carnage, but it interrupts what has been a remarkably smooth ride over the past six months.”

    To read my weekend newspaper column click here:  Which Way For Gold From Here-

    Subscribers to Street Smart Report: In addition to the charts and recommendations in the subscribers’  ‘Premium Content’ area of this blog, there are in-depth updates on the U.S. market, Global Markets, gold, and bonds from this week in the subscriber’s area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author


    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

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