Prior to the issuance of the weekly unemployment report on Friday, the media touted its expected impact on the stock market for days in advance. So when the report showed a smaller-than-expected decline, the market rallied from the opening to the close despite no improvement in the rate itself, which still stands at 9.7%.
The financial sector led the market with energy stocks close behind as the indices gapped higher on the opening, traded even higher at noon, and held the gains, enabling the Dow Jones Industrial Average (DJI) to close up 1.17%. It was the best daily gain for the Dow since Feb. 16.
The U.S. dollar was strong for most of the day, but closed fractionally lower as sellers came in just prior to the close.
At Friday’s close, the Dow was up 122 points to 10,566, the S&P 500 (SPX) gained 16 points to 1,139, and the Nasdaq (NASD) gained 34 points to 2,326.
Volume was again below average at 1.1 billion shares, with advancers ahead of decliners by 6-to-1. The Nasdaq traded 658 million shares with breadth at 4-to-1 positive.
April crude oil rose $1.29 a barrel to $81.50 on the positive economic news. The Energy Select Sector SPDR (XLE) rose $1.07 to $58.15.
Gold for April delivery gained $2.10, closing at $1,135.20 an ounce, and the PHLX Gold/Silver Sector Index (XAU) gained 2.78 points to $170.81.
What the Markets Are Saying
Stocks were strong again on Friday as a broad rally, encouraged by an unexpectedly positive unemployment report, drove stocks to their highest levels since early January. Most impressive of all was the Nasdaq, which gapped on its opening and ended the day at not only a new high in more than a year, but its highest closing since September 2008. And the other indices are following the Nasdaq to the top of their ranges.
But the internal indicators are now grossly overbought. The Relative Strength Index (RSI) for the Dow is at 63.64, its highest reading since Jan. 4, when it was at 65.99.
And one of our most watched sentiment indicators, the American Association of Individual Investors (AAII) survey has shown an increase in bullishness by small investors for three straight weeks, while letter writers have become bullish, as well.
This past weekend, there was a report that mutual funds, one of the most powerful sources of buying, have been “burning through cash” at the fastest rate in more than 18 years, and now have only 3.65% cash available for investment.
However, momentum, though overbought, is still moving up, and although that’s a near-term positive, the recent strength could be coming from the public.
My guess is that this week will open strong with an early attack on the highs. And it is possible that a new high could occur. But rallies like this are common and usually lead to a quick retracement of 30% to 50% of the hard-won gains.
Could the market break out to new highs? Of course. But low volume, a high mutual fund cash burn-rate along with low cash positions, and a focus on positive news to keep the rally going are indications that the market is in weak hands.
If you must trade, do it on a very short-term (daily) basis. And if you must invest, only put new money into stocks with strong earnings and a history of regular dividend increases, or commodity-based stocks like energy, metals, etc.
Today’s Trading Landscape
Earnings to be reported before the opening include: Comverge, Duoyuan Global Water, Ebix, Freeseas, Poniard Pharmaceuticals and Yingli Green Energy.
Earnings to be reported after the close include: CAI International, Callon Petroleum, Casey’s General Stores, Force Protection, H&R Block, MAKO Surgical, National CineMedia, ResCare, Sun Hydraulics, TiVo and Vivus.
There are no significant economic reports due today.
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