Friday’s session opened strong due to a Labor Department report that showed the U.S. economy losing just 11,000 jobs from the non-farm payrolls in the month of November.
This was much less than expected and dropped the unemployment rate to 10% from 10.20%.
But the euphoria lasted only as long as it took for investors to conclude that the favorable numbers could lead to a possible tightening by the Federal Reserve.
Gold was hard hit as the U.S. dollar gained on thoughts that interest rates could be raised earlier than expected. The dollar experienced its biggest gain of the year versus several other currencies. The greenback was up 2.8% versus the yen, and the U.S. Dollar Index (a basket of six currencies) was up 1.6%.
The more speculative stocks rallied, and both the S&P 600 SmallCap Index (SML) and the mid-cap Russell 2000 (RUT) rose sharply. The S&P 600 was up 3.1%, and the Russel gained 2.4%.
Even though the small- and mid-cap stocks are considered riskier investments, they are companies that respond more quickly when an economic turnaround occurs.
Technology stocks that are broadly represented in both indices had a strong day with Microsoft (MSFT), EMC (EMC), Cisco Systems (CSCO), Intel Corp. (INTC) and Hewlett-Packard (HPQ) all gaining.
At the close, the Dow Jones Industrial Average (DJI) was up 23 points to 10,389, the S&P 500 (SPX) rose 6 points to 1,106, and the Nasdaq (NASD) gained 21 points to 2,194.
The NYSE traded 1.5 billion shares with advancers over decliners by more than 3-to-1. On the Nasdaq, 748 million shares changed hands and advancers there beat decliners by about 3.5-to-1.
For the week, the Dow was up 0.8%, the S& 500 gained 1.3%, and the Nasdaq advanced by 2.6%.
On Friday, crude oil for delivery in January closed at $75.47 a barrel, down 58 cents. The Energy Select Sector SPDR (XLE) fell 41 cents to $55.90.
The sharp reversal up by the dollar produced in the opposite result for gold. The February contract fell $48.80 to settle at $1,169.50 an ounce, and the PHLX Gold/Silver Sector Index (XAU) lost $10.55, closing at $181.96.
What the Markets Are Saying
As the year winds down, there are so many crosscurrents at work that it is difficult to get a clear picture of the next four weeks.
We’ve already discussed the impact on the market of fund managers’ locking in their bonuses following a good year of returns. They do this by selling the more speculative issues, especially the ones in which they have big gains, and seeking a safer haven until the new year when they can afford to again take risk — since they have an entire year to correct early errors.
But on Friday a funny thing happened on the way to easy street for these managers.
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Before Friday’s open, it was announced that the unemployment rate fell sharply. With that, the large caps fell away for the third time from their highs under the assumption that the free ride for the banks of almost 0% borrowing would cease.
That reversal caused a small triple-top in the Dow and S&P 500, and the S&P 500 even flashed a minor sell signal from our internal indicator, the Collins-Bollinger Reversal (CBR).
But that’s not all. Just as analysts were concluding that the market has failed to break out and establish a new leg up, the small- and mid-cap stocks took off on tear.
That turnaround resulted in a buy signal from the slow stochastic on the Russell 2000 and the S&P 600, and also a buy signal from our CBR indicator. And the momentum indicator on both of those indices turned positive.
Before Friday, momentum had been negative, and the major indices seemed to be telling us that nothing would happen before the end of the year. In other words, investors would be focusing on the holiday and the chances were good that the markets would grind to a slow pace.
But the buying in the small- and mid-caps on Friday is uncharacteristic at this time, even though the “January Effect” has historically started as early as mid-December.
Friday’s rally was focused on the technology sector — always an institutional favorite and among the first to benefit from a new economic cycle.
It all seems just too pat.
A conclusive thrust above S&P 1,120 — my intermediate target for many months — would convince me that the market is headed higher. Until then, well, I suppose I just need some convincing.
Today’s Trading Landscape
Earnings to be reported include: Blyth Industries, Gerber Scientific, Layne Christensen, Casey’s General, Focus Media and Pep Boys.
Economic report due: consumer credit (the consensus expects -$8.8 billion).
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