While markets in the U.S. and across Europe were shut for Good Friday, the U.S. Labor Department reported that employers added 120,000 jobs in March. The number was the fewest in five months and well below the median economist forecast of around 200,000. The amount had previously exceeded 200,000 for three straight months.
Traders only had 45 minutes to react to the news on Friday via the S&P 500 futures, which quickly fell 1.1% to 1,374.90 after recording its largest weekly loss.
Click to Enlarge Yields on 10-year Treasuries dropped while the dollar rallied on the news. After trading with extraordinarily low volatility for all of 2012 thus far, U.S. stocks might now finally see increased volatility. The VIX has been trending lower all year and as of this writing still trades well below the 20 mark, which could quickly change this coming week. Once the VIX starts lifting above 20, protection via puts swiftly gets more expensive and often accelerates higher as investors frolicking around sans insurance scramble to protect their portfolios.
U.S. markets open again Monday morning but many European markets will not reopen until Tuesday. Given the weak tone of European equity, credit and rates markets the past two weeks, U.S. investors likely will want to see European markets trading before making bigger decisions.
It is important to note that recent weakness in emerging markets, Asian and European equities as well as increased volatility in commodity markets eventually also will lead to profit taking in U.S. large-cap stocks.
As such, Monday should see pressure in U.S. equities at least at the open as traders react to and digest Friday’s employment report.
The S&P 500?s 12% run in the first quarter of 2012 was impressive, but last week it came to at least an intermediate halt as Monday’s sharp rallying start to the second quarter had evaporated by Wednesday on more concerns over Europe and the global economic growth story.
Click to Enlarge From a technical point of view, last Monday’s push of the S&P 500 up to the 1,422 area had many marks of a final squeeze higher thanks to mutual fund inflows at the start of the new quarter. While stocks still could go higher and 1,440 might get reached, at this stage it looks more likely that the crucial 1,370-1,375 support area will first be tested. A break and hold below there would break a strong uptrend dating back to mid-December 2011 and likely pull the index toward 1,340, where next support sits.
To say that the Nasdaq and the technology sector in general had a strong first quarter would be the understatement du jour. Apple (NASDAQ:AAPL) remains the major horseman to watch as it continues to make higher highs, and while I am not here to make any fundamental arguments against the stock, it would be careless on my part not to throw out a word of caution. If and when investors decide to start taking partial profits in Apple, the Nasdaq — and by extension the broader U.S. stock market — stands a high likelihood of a volatile price correction.
Click to Enlarge Last — and in many respects most important — note that the chart of the U.S. dollar index still is holding an uptrend dating back to September 2011 and last Thursday bounced strongly off that line, leaving behind a very visible hammer formation on the day. Should the dollar index be able to overcome and stay above 80, equities and other risk assets will find themselves much more challenged to continue their vertical melt-up.
In summary, expect markets to display more volatility this week with the potential for a first real meaningful price correction. The underlying central bank bid and further hope thereof remains intact; however, that doesn’t mean central bankers won’t at least allow a little breather in the risk asset rally before flexing their muscles again.