On Friday, a better-than-expected jobs report propelled stocks to the fourth straight day of gains. And this snapped a three-week losing streak with a gain for the week of 2.9% for the Dow, and 3.7% for the S&P 500 and Nasdaq.
Even though the unemployment rate jumped to 9.6% from 9.5%, investors were encouraged that the jobs numbers, along with earlier economic reports, indicate that the United States may be able to avoid a double-dip recession. Earlier in the week, the August consumer confidence report rose to 53.5 from 51, and the ISM index rose to 56.3 from 55.5 versus an expected decline to 52.9.
Financial stocks led Friday’s list of winners with Goldman Sachs Group, Inc. (NYSE: GS) up 5.7% and Bank of America Corporation (NYSE: BAC) up 1.66%. American Express Company (NYSE: AXP) rose 2.25%, and Citigroup Inc. (NYSE: C) was up 0.77%.
Treasurys fell, raising the 10-year note yield to 2.71% as investors opted for more aggressive stocks.
New York’s exchanges were closed on Monday to celebrate Labor Day. At Friday’s close, the Dow Jones Industrial Average rose 128 points to 10,448, the S&P 500 gained 14 points to 1,105, and the Nasdaq gained 34 points to 2,234.
The NYSE traded 946 million shares, and the Nasdaq crossed 476 million shares. On both exchanges advancers exceeded decliners by about 3.5-to-1.
October crude oil fell 42 cents to $74.60 a barrel on Friday, and was unchanged in London on Monday. The Energy Select Sector SPDR (NYSE: XLE) rose 65 cents to $54.20.
December gold fell $2.30 to $1,251.10 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) rose 0.4 points to 186.81.
What the Markets Are Saying
On Wednesday, the S&P 500 reversed from the 1,040 support line with an astounding rally that was accompanied by a broad rally in the other indices. This prompted follow-through rallies on Thursday and Friday, which together erased more than 70% of the losses for the entire month of August.
But is this the beginning of a new bull market or just more of the same volatility that ended in a double-top in late July at 1,129?
Three days following the July 7 reversals that led to the top at 1,129, the internal indicators were at almost the precise level we see now, and had flashed strong buy signals just like now. But the July rally started from a lower number — 1,028 versus 1,049. Thus, if the current rally continues at the same pace, it could break through the 1,130 tops to around 1,140 or even 1,150.
And there is another difference between then and now: The buying was strong enough to create a gap in the S&P 500’s prices on Friday of almost 4 points, an unusual happening for the broad-based index. And the rally cleared both the 20-day and 50-day moving averages. All of this could be explained by the low pre-holiday volume, but it is still an unusual event.
These are all positive signs, but they don’t necessarily mean that prices are about to break through the substantial resistance from 1,100 to 1,130. And then there is the 200-day moving average, now at 1,115, that stopped the last two attempts (June and August) to change the overall trend. Volume, too, continues to be a problem. Thursday’s break, which vaulted prices over the 20-day and 50-day moving averages, was very light — in fact, it was the lightest volume in two weeks.
The bottom line is that we are still in a bear market with the intermediate trend sideways. Until the major indices can break and hold above the substantial resistance at 1,130 to 1,150 (December’s high), we must assume that this recent rally will fail just like its predecessors.
Elements of a Successful Trading Strategy
Now, let’s get back to the requirements of a profitable trader. Successful trading demands that you follow a plan, and that requires discipline. Trading stocks can be profitable, but not without a code of discipline that literally takes the emotions and guesswork out of the equation. You cannot be successful without discipline, and you cannot have discipline without the rules that you write in your trading plan. Recognize that you will experience losses, but it is how you learn from the losses that will eventually allow you to achieve a winning strategy.
1. Objectives: Time willing to spend trading, capital you can commit, amount you are willing to lose, rate of return you seek
2. Types of Trading Vehicles: Stocks, options, futures, ETFs, etc.
3. Leverage: Use of margin, leveraged ETFs, etc.
4. Methodology: Entry rules, exit rules, stop-loss points
5. Documentation: Every trade documented as to why the position was entered, gain/loss, and if a loss, why your strategy failed
6. Risk Management: Determine the minimum entry amount and the maximum to risk on a trade — the smaller the risk the better
7. Charting Software: Plenty is available for little or no cost, but you must understand the fundamentals of technical analysis (see The Technical Analysis of Stock Trends by Edwards and Magee)
8. Back-testing: Before you enter an actual trade you must play the game with software that back-tests your trading strategy; only enter real trades when your system appears to be successful
For an excellent primer on successful planning, get a copy of David Jenyns’s Ultimate Trading Systems: Your Blueprint To Trading Success 2.0.
Today’s Trading Landscape
Earnings to be reported before the opening include: Animal Health International, Casey’s General and Pike Electric.
Earnings to be reported after the close include: Flow, Mitcham Industries, Navistar, Pep Boys and Phillips-Van Heusen.
Economic report due: Treasury STRIPS.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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