Stocks had a wild session Friday, with intense volatility. Traders came in gung ho as Thursday, during the Fourth of July holiday, Mario Draghi of the European Central Bank announced that low rates were here for a long time. This had been the first time the ECB had been explicit about rate guidance and European markets shot up dramatically, as did U.S. futures. Then at 8:30 AM came the monthly jobs data in the U.S. and it came in better than expected at 195,000 jobs created along with significant revisions upward to the previous two months. Initially futures surged even further but then the old worry about tapering of quantitative easing came into the market along with a spike in the ten year Treasury yield (which is competition for high dividend stocks). Stocks opened up decently but gave back all those gains by 10:30 AM to actually go negative for a short period. But as the day wore on buyers returned to the market and by the end if ended at its highs.
The economy added 195,000 new jobs in June, beating economists’ expectations of 165,000 jobs. Meanwhile, the unemployment rate remained unchanged at 7.6%. The number of jobs created in April was revised up by 50,000 positions, while May was revised higher by 20,000 jobs.
There were a lot of important moving parts today so let’s review. With the S&P 500 we had said the past few weeks we need to see a close of at least 1625ish to get back to a more healthy phase in the market. After teasing that level all week, and getting rejected at the 50 day moving average, this finally happened today. One more step for the bulls is besting the trendline of the lows of 2013 which is marked in dotted line in the chart below, that measures to the 1640 area. But we definitely see a move out of this descending channel which is a good first step. Still a lot of congestion to work through in the 1630s and 1640s, but above that bulls should wrest back control.
Same for the NASDAQ.
Even better are the small caps which clearly busted out of their channel and are the best looking of the indexes. Usually smaller fare indicate a risk on mode, so their leadership is a positive.
As we move over to the bond market we had said this 2.40% level on the 10 year bond is important, it was a clear double top breakout over the past few years. So what has happened? While yields pulled back they did not puncture that 2.40% level… and today they shot up. Now at first the market did not like it at all since a higher yield usually means competition for dividend paying stocks such as utilities and REITs, and higher yields also put pressure on some parts of the economy. But all in all these higher rates, which first shocked the market, and led to the correction, have now been accepted to a degree. That said the move upward has been fast and furious and bulls would like to see the pace slow.
The very popular TLT ETF which effectively is an inverse to yields was hurt very badly today.
Now let’s look at some sectors. We mentioned how regional banks broke out first among all subsectors last week. This is why it is important to note which group(s) are leading. Look at the performance of this group today and over the past week. Again regional banks make money the old fashioned way, lending it out – so higher yields are good for them as they borrow very cheap from the Fed and can lend at higher rates, making more money the higher yields go.
Of the 10 major S&P sectors consumer discretionary was the one we flagged as the first to break out. Again you can see how much cleaner this chart is than any other sector.
The next ones to break out potentially are financials and industrials. Both tried Monday but failed, but today closed at their highs. These are pro-growth groups so if it continues would be a positive for the market, as opposed to safety sectors leading.
Also let’s throw out another sub-sector, biotechs, as these broke out this week and never went down to fill their gap. The action earlier this week was not ideal (closing at lows Monday, and in middle of range Tue-Wed) but today was a very good day.
Last, look at oil, which despite a resolution in Egypt, did not come back either – remember this commodity was stuck for 6 months in a range and now is finally breaking out. It could lead to a substantial move, perhaps to the $120s+.
It is not all fine and dandy however – one area hurt by rising rates is housing. The homebuilders took it on a the chin as higher 10 year yields = higher mortgage rates.