U.S. equities bagged new record highs on Friday following a disappointing May payroll report.
The Dow Jones Industrial Average gained 0.3%, the S&P 500 gained 0.4%, the Nasdaq Composite gained 0.9% and the Russell 2000 gained 0.7%. Treasury bonds were stronger, the dollar was weaker, gold gained 0.8% and oil fell 1.4% to continue a recent run of weakness after reports of diminishing OPEC compliance in their recent output freeze deal (amid rising U.S. drilling activity and swollen inventories).
Breadth was positive, with 1.4 advancing issues to every decliner on the NYSE, with volume at 97% of the 30-day average. Technology stocks led the way with a 1% rise, with Amazon.com, Inc. (NASDAQ:AMZN) up 1.1% to close above the $1,000 level for the first time. Google parent Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) looks to be next on the list, closing at $996.
Energy names were the laggards, down 1.2%, with financials under pressure as well, down 0.4%. Bank stocks lost 0.7% on headwinds from lower long-term interest rates (which weigh on net interest margin hopes), evidence of stalled loan activity, and chatter of lower trading revenue. Bank of America Corp (NYSE:BAC) is on the verge of a massive head-and-shoulders breakdown here, lifting the June $23 BAC puts recommended to Edge Pro subscribers to a 64% gain.
Lululemon Athletica inc. (NASDAQ:LULU) gained 11.6% on a quarterly earnings beat with same-store sales down 1% vs. the 2.1% drop expected. Investors are hopeful of accelerating customer traffic trends amid new colors, a global ad campaign launch, and updates to its ecommerce presence. RH (NYSE:RH) — formerly called Restoration Hardware — was slammed 25.7% despite a Q1 revenue beat and in-line earnings as forward guidance was cut below estimates as management highlighted a slower store opening pace.
Although the unemployment rate fell to 4.3% (lowest since May 2001), it was driven by a reduction in the labor force. Private payrolls grew just 138,000 versus the 185,000 expected, below the lowest estimate. Moreover, April and March job gains were revised lower by a net 66,000.
Stocks rose ostensibly on the hope the weak numbers — which is just the latest economic report to disappoint as the data overall is missing estimates on a scale not seen since 2015 — will force the Federal Reserve to slow its rate hike pace. This is corroborated by the rally in Treasury bonds underway.
But given that a very strong ADP private payroll report was cited the catalyst for the market’s rise on Thursday, the reality is the bulls feel like buying and are willing to use any and all justifications for it.
The question is: Is this is head fake blow off move or the start of another phase of the historic post-election uptrend?
On a purely price basis, the breakout to new highs is impressive. And given the increasingly short half-life of market selloffs over the past year and the inability of the market to be tripped up by anything (Brexit, Trump’s win, terror attacks, etc.) speaks to the resilience of the uptrend. A resilience based on the ongoing flow of cheap money stimulus from central banks in Japan and Europe.
The headwinds are there. The economic data is tepid. Seasonality is poor, with June historically one of the worst months for stocks (average return of -1.2% over the past 30 years).
Breadth remains narrow, as shown above, with less than 70% of S&P 500 stocks in uptrends. On Thursday, a day the S&P 500 hit a record high, nearly 6% of the stocks on the NYSE and Nasdaq hit a new 52-week low. According to Jason Goepfert at SentimenTrader, this is the second-highest percentage of new lows on a record day in more than 50 years second only to December 1999.
Should the uptrend continue despite this, according to Goepfert, “we will truly be seeing a unique moment in market history.”
Conclusion
Much depends on the ability of President Donald Trump to push through the tax cuts, healthcare reform, and infrastructure spending plans Wall Street eagerly priced into stocks following Election Day. And much depends on how aggressively the Fed will tighten policy through the rest of the year.
We’ll know more very soon. Former FBI Director Comey is set to testify before Congress next week on reports Trump pressured him to drop an investigation into former national security advisor Michael Flynn’s ties to Russia — the catalyst for the severe market drop on May 17. And the Fed will unveil next policy announcement and updated economic and interest rate projections on June 14.
If you just want to stick to the technical outlook, keep an eye on the Russell 2000 small-cap index. It’s been lagging the tech-heavy Nasdaq and remains within the confines of a seven-month consolidation range.
Should the Russell break to new highs above 1,420, then it’ll be a sign the rally is worth chasing. Especially if it’s accompanied by a rise in long-term interest rates.
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.
Check out Serge Berger’s Trade of the Day for June 5).
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Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
