Stocks retreated for the second straight day on Friday, as European worries plagued trading. But an increase in nonfarm payrolls and a drop in the U.S.unemployment rate to 8.5% offset Europe’s sovereign debt crisis and new problems — an increase in European unemployment and a drop in Germany’s factory orders.
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The U.S. dollar was strong throughout the session, hitting new highs while the euro plunged to new lows. Last year, a strong dollar and weak euro almost always led to a big sell-off in stocks.
Instead, on Friday, the Dow Jones Industrial Average fell just 56 points to 12,360, the S&P 500 lost just 3 points at 1,278, and the Nasdaq gained 4 points at 2,674. The NYSE traded 709 million shares and the Nasdaq crossed 440 million. Breadth was slightly negative on both exchanges with decliners ahead by a ratio of 1.2-to-1. For the week, the euro was sharply lower while the Dow industrials gained 1.2%.
Despite last week’s low volume, the U.S. stock market did well. The Dow Jones Industrial Average confirmed its break from the August to December bearish resistance line. The S&P 500 broke through its 200-day moving average and intermediate downtrend line. And the Nasdaq sustained a break through both its 200-day moving average and its intermediate downtrend line.
As for the major indices, there are just two concerns: Neither the S&P 500 nor the Nasdaq has yet to close above the October high. For the S&P 500, that number is 1,293, and for the Nasdaq it is 2,753.
There is also a concern regarding mid- and small-cap stocks. The failure of the Russell 2000 (small cap), as depicted by the iShares Russell 2000 Index Fund (NYSE:IWM), to pop through its October and December highs and its 200-day moving average means that a significant number of investors are not yet ready to take the plunge into more volatile stocks.
Finally, bullish sentiment soared to an 11-month high, according to the AAII Sentiment Survey. And bearish sentiment fell to levels not seen since December 2010. Sentiment is usually considered a “contrarian indicator.” Since the survey is based on investors’ expectations for the next six months, it may merely be telling us that we shouldn’t expect a major breakout to new highs soon and, that until mid-year the indices will likely trade within the boundaries of 1,285 to 1,350.
Sluggish breakouts like last week’s are often followed by shallow pullbacks. Nevertheless, the breakout occurred, and so we should be buyers on any retreat as long as the pullback falls short of violating the respective 50-day moving averages of the major indices.
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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.
