Stocks rallied Friday following a stronger-than-expected July jobs report, driving the S&P 500 and Nasdaq to new record highs. The Labor Department reported nonfarm payrolls increased 255,000 in July, while analysts had only been expecting 185,000 jobs to be added.
In addition to the strong employment numbers, investors have been cheered by foreign central banks’ stimulative efforts — which have forced investors out of bonds and other “safer” investments and into common stocks — and Q2 earnings results. FactSet reports that with 86% of companies in the S&P 500 already reporting, earnings are on track to decline 3.5%, much better than the 5.5% decline projected at the end of June.
Taken together, these factors are viewed as evidence that the economy is not as weak as previously forecast but not strong enough for the Federal Reserve to increase interest rates.
Financial stocks, which have been a disappointment recently, sprang to life this past week. The key sector has had to buck the threat of no imminent rate hike, a decline in the price of crude oil and further excessive regulation. But it appears that the group is so oversold that it can no longer be ignored by investors. (See my Trade of the Day.)
At Friday’s close, the Dow Jones Industrial Average gained 191 points at 18,544, the S&P 500 rose 19 points to 2,183, the Nasdaq jumped 55 points to 5,221, and the Russell 2000 was up 18 points at 1,231.
The NYSE Composite’s primary exchange traded 868 million shares with total volume of 3.6 billion. On both major exchanges, advancers outpaced decliners by 2.6-to-1. Block trades on the NYSE increased to 5,243 from 4,556 on Thursday.
For the week, the Dow rose 0.6%, the S&P 500 gained 0.4%, the Nasdaq was up 1.1%, and the Russell 2000 advanced 0.9%.
Tuesday’s sell-off scared many bulls into liquidating holdings despite the market’s overall positive outlook. The high volume was a negative, but a late rally actually accounted for much of the volume despite the negative close. Now, however, the S&P 500 is in uncharted territory with nothing standing in its way, so its upward march is likely to continue.
Conclusion
Following Tuesday’s decline, I concluded, “Pullbacks should be treated as buying opportunities, especially for investors. Traders should track the support at Tuesday’s 2,147.58 low in the S&P 500 for clues as to the near-term direction of the market.”
Admittedly, there was no way I could have predicted a “bear trap,” yet I also noted that consolidations usually break in the direction they are entered — up in this case.
How far will stocks run on this breakout? Probably about 50 points (minimum) to 75 points from Friday’s close, calculated from the support line at 2,100 to the July 22 closing high at 2,175.
The bull is back. Ride ’em cowboys.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
