Stocks rose just prior to the close on Friday, setting new two-year highs. For most of the day stocks were mixed as investors tried to make sense of a confusing payrolls report in which the unemployment rate was stated to be 9% despite a gigantic miss on non-farm payrolls. Economists had predicted 148,000 new jobs, and instead only 36,000 were reported, and private payrolls increased by 50,000 while the expectation was for 163,000. The explanation for the drop in the unemployment rate was that 504,000 people dropped out of the civilian work force.

Daily Stock Market News

Dow: +30 points at 12,092
S&P 500: +4 points at 1,311
Nasdaq: +15 points at 2,769

Volume and Breadth

NYSE: 919 million shares; decliners ahead 1.1-to-1
Nasdaq: 519 million shares; decliners ahead 1.1-to-1

For the Week:

Dow: +2.3%
S&P 500: +2.7%
Nasdaq: +3.1%

Futures and Related ETFs

March Crude Oil: -$1.42 per barrel at $89.12; Energy Select Sector SPDR (NYSE: XLE) -19 cents at $74.13
April Gold: -$4 per ounce at $1,349; PHLX Gold/Silver Sector Index (NASDAQ:XAU) -1.59 points at 207.25

What the Markets Are Saying

The major indices, except for the NYSE Composite, inched to new highs on Friday as the result of a mini-rally just before the closing bell. And those highs confirmed that both the Dow industrials and the S&P 500 are still in strong uptrends. Even though Friday’s trading was anemic with little direction and low volume, the market had strong gains for the week — mostly helped by better-than-expected earnings from some of the country’s biggest corporations.

Until Friday, the Nasdaq was lagging, having not advanced to new two-year highs, while the Dow and the S&P 500 punched into new territory every day from Tuesday to Friday. But Friday’s new high confirms the support level of the Nasdaq is at 2,676, which is the recent low of Jan. 7 and Jan. 31. Following last week’s price action, we can say with confidence that from a technical analysis point of view, trading within the band of 2,676 to 2,766 is normal, and that the index is in a strong uptrend. And that’s the good news.

The not-so-good news is that a number of “non-confirmations” exist. The most serious of those is the Dow Transportation Average, where we can see several negative developments

First, the near-term bullish trendline has been broken, along with both the 20-day and 50-day moving averages. Next, since the high on Jan. 16, the index has traced out a series of lower highs and lower lows, thus, it is in an intermediate downtrend. Finally, the slow stochastic is bearish with the fast line (red) trading below the slow line (blue). Non-confirmations in the Dow indices are notorious preliminary indicators of a pending market correction.

And there is another index that is diverging as well. The Russell 2,000 is also tracing out a series of lower highs and lower lows. But the 2,000 has only penetrated its 20-day moving average and reversed from its 50-day without closing under it. And there is another positive regarding the 2,000 — it flashed a bullish signal on Friday from its slow stochastic as the fast line crossed above the slow line. It appears, therefore, that the Russell 2,000 has recovered enough to disregard its recent divergence.

Regarding the transports, the tripling of the price of crude oil in just over two years has little impact on the earnings of all forms of transportation whether rail, air or truck. Notice that the monthly charts of the price of crude oil and the Dow transports do not normally negatively impact each other as long as the move up is steady and at a measured pace. That’s because of effective hedging programs.

But a sudden move above $100 per barrel of crude could have a serious impact on the economy including the price of food, energy and raw materials — and the stock market. Notice that the transports didn’t crash in 2008 until oil made a sudden flash high at over $130 a barrel. Investors should recognize that the crisis in Egypt could create another flash high as in 2008 with a potential impact not only on transportation, but the entire economy.

Last week, we discussed the direct impact of Fed policy on the markets, and today, the impact of higher crude oil prices on the markets. As long as the Fed’s QE2 policy is able to offset higher oil prices, stocks will likely continue to rise. But even the Fed has limited resources, and the price of crude oil could rise sharply in the event of a slowdown of oil flowing from the Middle East. We will remain very cautious bulls. 

See the Trade of the Day.

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.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.