Economists and analysts continue to talk about the economy making the slowest recovery since World War II, yet stocks continue to rise. On Friday, gains were made in the face of a jobs report that showed a loss of 94,000 jobs in September versus expectations of no change.
The market’s reaction makes sense in a perverse way since every negative economic report is viewed as more pressure on the Fed to implement “QE2,” the second round of quantitative easing. And talk now is not only about the U.S. Federal Reserve, but also of the possibility of implementation of a similar plan by the Bank of England and Japan.
Alcoa Inc. (NYSE: AA) started the Q3 earnings season with a bang, announcing that revenues climbed by a greater-than-expected 14.6%, and the stock jumped 5.7%. Earnings per share were 9 cents versus a consensus estimate of 5 cents, and management increased upside guidance.
Blue chips continued to perform well: Caterpillar Inc. (NYSE: CAT) rose 2.1%, The Walt Disney Company (NYSE: DIS) gained 1.8%, and The Procter & Gamble Company (NYSE: PG) gained 1.7%.
But small-cap stocks continue to outperform all others. On Friday, the Russell 2000 Index rose 1.4% to its highest close since May 17. And the S&P SmallCap 600 Index rose 1.3%, led by the energy and material sectors.
Treasurys were strong on the disappointing jobs report. The yields on the two- and five-year notes fell to record lows, and the 10-year note’s yield fell to 2.332%, which is the lowest yield since January 2009.
The U.S. dollar fell to a 15-year low versus the yen, and the euro closed at $1.3929, up from $1.3912 on Thursday.
At the close, the Dow Jones Industrial Average was up 58 points to 11,006, the S&P 500 gained 7 points at 1,165, and the Nasdaq rose 18 points at 2,402. The NYSE traded 945 million shares with advancers over decliners by almost 3-to-1. The Nasdaq traded 522 million shares, and advancers there were ahead by 2.5-to-1. For the week, the Dow gained 1.6%, the S&P 500 rose 1.6%, and the Nasdaq gained 1.3%.
Crude Oil for delivery in November rose 99 cents to $82.66 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) closed at $58.36, up 72 cents. December Gold rose $10.30 to settle at $1,335.40 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) rose 3.52 points to 204.81.
What the Markets Are Saying
On Friday, the news couldn’t have been worse as jobs numbers again missed estimates, and yet the market rallied. In reading comments from our readers, I was reminded of the market axiom, “Don’t fight the tape,” which had been a favorite expression of the person who hired me into the investment world as a trainee in 1966. What it means is that despite your personal feelings about the value of stocks, you should follow the trend, and even if the market is going against all other logical information it is the trend that is most important.
I’ve occasionally reminded our readers of a variation on that theme, saying that when bad news is treated well, we are facing a very strong market. And, of course, the opposite is true, i.e., when good news is treated badly you had better exit your stock positions. Other similar expressions are “Don’t step in front of a moving train” and “Stocks that make new highs will continue to make new highs.”
These expressions, like support and resistance lines, trendlines, moving averages and virtually every tool in the technician’s toolbox are subject to exhaustion. Obviously stocks don’t move up against bad news forever, nor do bull and bear markets last forever. That is why the wise trader will not only review his positions frequently to determine if they are keeping pace with the market, but will enter trailing stop-loss orders to protect against sudden reversals.
Nevertheless, losses as well as gains are a part of investing. I know that even though I may exhaustively research the technical trading aspects of every trade and recommendation, some will fail. That’s part of the business and it is no one’s fault — there are simply just too many moving parts to keep track of everything, and unexpected news often smacks you before you are out of the gate. Blaming yourself or others achieves little. When losses occur, the wise investor casts no blame, seeks to know the reason for the loss, and if necessary, adjusts the strategy, puts it in the past, and moves on.
For a dividend stock you should consider buying, see the Trade of the Day.
Today’s Trading Landscape
Earnings to be reported after the close: Global Payment.
There are no significant economic reports due today.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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