After a week of some of the worst economic news and corporate earnings forecasts in memory, on Friday the market was ready to accept a poor jobs number. Instead it got the worst news in 26 years.
Non-farm payrolls were down 533,000 in November and higher than the most pessimistic forecasts; the unemployment rate jumped to 6.7% from 6.5%.
The report was issued before Friday’s opening, so the market opened lower and continued to head south until at 10:30 a.m. Eastern when the Dow Industrials (DJI) were down 257 points. But since the jobs number was so poor, analysts felt that the new administration’s large stimulus package would have little trouble passing, so some buyers moved in for bargain hunting — moving prices off of their lows.
Hartford Financial Services (HIG) has been the subject of several research reports indicating the company is in financial trouble and the stock had fallen from above $100 a share in June 2007 to under $6 in November. But on Friday afternoon, HIG leaped $7.38, up 102%, on the company’s declaration that its capital position was strong, and it even hiked earnings forecasts for the year.
And so it was the Hartford story — and talk by several Congress members that the automakers would somehow be bailed out — that led to a huge broader-based turnaround that brought the Dow Jones Industrial Average (DJI) to close at 8,635, up 259 points. The S&P 500 (SPX) gained 31 points at 876 and the Nasdaq (NASD) was up 64 closing at 2,509.
The New York Stock Exchange traded 1.6 billion shares, with breadth at a positive 2-to-1. And the Nasdaq was also ahead by 2-to-1, with volume there at 978 million shares traded.
For the week the Dow (DJI) was down 2.2%, the S&P 500 (SPX) fell 2.3% and the Nasdaq (NASD) was off 1.7%.
Crude oil (January contract) ended down $2.85 to $40.81 a barrel and has fallen almost 25% in just one week. The Amex Energy SPDR (XLE) rose 90 cents to $44.16.
Gold (February contract) fell $13.30, closing at $752.20 per troy ounce, and the PHLX Gold/Silver Index (XAU) fell 12 cents to $87.58.
What the Markets Are Saying
Lately I’ve been talking about the psychology of the market, pointing out that when the market rallies on bad news this is usually a signal that the near-term downtrend has reversed. Friday’s tape action was a classic demonstration of this phenomenon and additionally was accompanied by another key reversal day.
No one should doubt the significance of the current support zones on the major averages since reversals of daily, key and our internal Collins-Bollinger Reversals (CBR) have peppered the charts since early October.
But Friday’s turn was dramatic in that the jobs report is one of the most-followed indicators even though some would say that it is a trailing indicator. But if it is a trailing indicator, it may be telling us that the recession will end no more than 6-9 months from now — and could end as early as March.
Friday’s turn illustrates how quickly traders must change direction if they are to be successful in today’s highly volatile environment, and flexibility is a characteristic of the profitable trader. Until Friday my clients were short, riding the contra-Exchange-Traded Funds (ETFs) with the possibility that the current zone of support could be destroyed with a thrust lower.
Instead, it was evident in the first hour of Friday’s session that the bad jobs news was not going to be greeted with the anticipated high-volume sell-off. Thus, we quickly swapped some of our ETF shorts to longs and quickly wrote protective options on the remainder with huge premiums that expire in December. By day’s end, clients were nicely ahead instead of nursing the losing shorts.
The volatile market will reward the flexible trader but will bury the trader who sticks by a position because he thinks he knows where it is going. Today’s lesson is to be flexible and reactive instead of predictive. If you pay attention to the signals, the market will usually tell you of its next change in direction, and we are here to interpret those changes for you every morning.
Today’s Trading Landscape
Earnings to be reported include: C&D Technologies (CHP), H&R Block (HRB), IDT Corp (IDT), International Assets Holding (IAAC), Learning Tree International (LTRE), Mitcham Industries (MIND), National Semiconductor (NSM), Resource America (REXI), Rostelecom (ROS) and Synergetics USA (SURG).
There are no economic reports due today.
A package to save the automakers is expected to be announced tomorrow.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
