Market Ignores Poor Job Numbers...
4/29/2011 9:06:35 AM
With a satisfactory GDP number, the market ignored another poor jobless claim number...
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Daily Trading Action
The major index ETFs opened lower and rallied for the first forty-five minutes. The market then took on different characteristics with the Dow and S&P-500 see-sawing higher and the NASDAQ-100 edging lower. By 1:30pm, all three had descended together and reversed to head higher into the close. This left the Dow and S&P-500 closing in positive territory with the NASDAQ-100 posting a loss of less than two tenths of one percent. The Semiconductor Index (SOX 447.54 -3.10) closed down seven tenths of one percent after having dipped some one and one quarter of one percent intraday. The Russell-2000 (IWM 86.08 +0.39) posted a fractional gain. The Regional Bank Index (KRE 26.90 +0.12) posted a fractional gain as did the Bank Index (KBE 25.68 +0.12). The Finance Sector ETF (XLF 16.41 _0.13) posted a strong fractional gain. Longer term Bonds (TLT 93.60 +0.71) posted a strong fractional gain as well. NYSE trading volume was almost identical to Wednesday with 958M shares traded. NASDAQ share volume was also similar to Wednesday's average volume with 1.994B shares traded.
There were five economic reports released:
- GDP-Advance (Q1) came in at +1.8% growth versus an expected +1.7%
- GDP Deflator (Q1) came in at +1.9% growth versus an expected +2.4%
- Initial Jobless Claims for last week came in at 429K versus an expected 390K
- Continuing Jobless Claims came in at 3.641M versus an expected 3.690M
- Pending Home Sales (Mar) rose +5.1% versus an expected +1.7% rise
The first four reports were released an hour before the open. The remaining report came out a half hour after the open. While the GDP number met expectations, the GDP deflator showed a better than expected inflation picture (although inflation is running higher than economic growth). The jobs picture showed unemployment claims above 400K for the third week in a row, which is a big negative and that is the reason for early weakness in U.S. markets. Pending Home Sales surprised with a better than expected housing number but it was essentially ignored by the market.
The carry trade, where traders by the U.S. dollar and exchange it for higher yielding currencies, is in play. The Yen carry trade is also in place. Japan's central bank and the Fed have similar interest rate policies which are very near 0.0% lending rates. Borrowing in one of them and buying Australian dollars (currently Australia's Central Bank has a yield of 4.75%) is quite a profitable trade. With the Fed confirming the dovish stance for an "extended period", traders have re-emphasized the trade pushing the dollar down even further.
The U.S. dollar fell three tenths of one percent to close at a new two year low.
Implied volatility for the S&P-500 (VIX 14.62 -0.73) fell nearly five percent as did the implied volatility for the NASDAQ-100 (VXN 16.20 -0.83).
The yield for the 10-year note fell six basis points to close at 3.31. The price of the near term futures contract for a barrel of crude oil rose ten cents to close at $112.86.
Energy (-0.2%) was the sole decliner and Tech was unchanged. The other eight out of ten economic sectors of the S&P-500 moved higher led by Consumer Staples (+0.8%), Financials (+0.8%), Utilities (+0.7%), and Healthcare (+0.5%). With the exception of recently oversold Financials, the other three leading sectors are defensive in nature.
Market internals were positive with advancers leading decliners nearly 3:2 on the NYSE and by 5:4 on the NASDAQ. Up volume led down volume 3:2 on the NYSE and by nearly 5:4 on the NASDAQ. The index put/call ratio fell 0.14 to close at 1.14. The equity put/call ratio fell 0.05 to close at 0.55.
Commentary:
Thursday's trading began with an as expected GDP number but with a definitely disappointing jobs number. Eventually, the gap down open turned into a rally and the bulls began to stampede. However, the lack of participation by the semi-conductor index and the NASDAQ-100 is cause for concern. On the bullish side of the equation, the financial sector got into the act as did the bank indexes so the constant bearish tone of financials could be easing.
For our part, we will weather the storm of the last trading day of April in anticipation of a potential move lower in the near future. We don't currently have a set-up indicating an immediate move lower but there are several things to consider here:
- Seasonality favors a bearish stance beginning on Monday
- The U.S. dollar is so oversold, a reversal higher could come at any time, which will likely cause a significant sell-off for equities and commodity prices
- Bonds appear, however implausible to be ready to continue a rally
On the bullish side of the argument, the game of musical chairs where the Fed is pumping up the liquidity will continue through June. With participants knowing that the flow of liquidity will end in two months, it is a game of chicken to see who will blink first. As long as the liquidity is available, the funds will be put to work. A pop-up higher for the dollar, however, will likely be seen as dangerous to the carry trade and liquidity could collapse quicker than expected. In particular, when everyone in the carry trade wants to exit at the same time, the crowd will trample each other in a race for the exits. In other words, when the music stops, everyone will be desperate to find a chair, but there won't be enough. Since all parties know this, it is just a matter of time before fear overtakes greed as the primary emotion.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
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Author: Mark McMillan
Mark McMillan
The McMillan Portfolio
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