foxex: Bulls Stampede on Positive Economic Data

Chart Advisor | INVESTOPEDIA

Focus on the Price

By John Jagerson, CFA, CMT

Friday, January 04, 2019

1. Jobs and Powell send indexes through the roof

2. S&P 500 trading range still signals uncertainty

3. Confirmation from currencies could happen next week

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Major Moves

The major market indexes skyrocketed today following a report that the US added 312,000 new jobs in December. Economists had expected 179,000 new jobs to be added which makes this a surprise on par with the February, 2018 jobs report. Investors should know that the jobs report is seasonally adjusted, which means that the spike in hiring around the holidays, and the summer construction season, are not supposed to show up in the data. This is also true for the seasonal worker layoffs in January and at the end of summer. However, since we don't know what those numbers actually are for the entire population, the adjustments are estimates.

Surprises like this are usually offset by a disappointment as estimates are revised over the next month or two. That is not to say that this news wasn't legitimately positive, rather investors should take a longer term view of data like this.

The Fed chair, Jay Powell, added to the enthusiasm with fairly dovish comments about limited signs of inflation. Traders interpreted those comments to indicate that the Fed is not overly anxious to continue raising rates in 2019.

S&P 500

From a technical perspective, today's rally was probably a little overdone but market breadth was very good. Small caps outpaced large caps which is exactly what we want to see in a bull market. The underperforming sectors were defensive, such as utilities and consumer noncyclical. A move from defensive sectors to riskier sectors further confirms the bullish sentiment today.

As I mentioned earlier this week, the rally that started on the 26th of December has been turned back at the 61.8% Fibonacci retracement level twice before and paused just past that level today. The question at this point is how likely stocks are to rise from here? The trading range over the last two weeks has been very large. As a general rule, the more stocks are moving (even in a positive direction) the less stable prices are in the short-term.

As you can see in the following chart, the Average True Range ATR–a measure of volatility based on the distance between the prior close and the current high or low–falls during extended rallies. The market didn't really break out of its consolidation range in mid-2018 until the ATR had fallen considerably. If the ATR starts to decline from here, I would consider that positive confirmation of the bullish rally, increasing the odds of more gains. Alternatively, if the ATR remains elevated, I would assume the price is still unstable and the market could drop again.

FedEx and UPS Should Hold the Lows
Understanding the Average True Range

Source: finviz.com

Risk Indicators

Although market breadth was very positive, I would have liked to see more confirmation in the Forex. Prior to the pre-Christmas break down, safe haven currencies like the Japanese yen had been relatively weak, which indicated that investors were not ready to panic. This turned out to be a house of cards that collapsed culminated in a flash crash during the Wednesday/Thursday session.

In the following chart, the USDJPY exchange rate falls when the Japanese yen is rising in value. This can be a little confusing for non-Forex traders but try to imagine that ideally you want to see the USDJPY chart trending the same direction as the S&P 500. Although there was some positive movement today, it was underwhelming compared to the US stock indexes.

Part of the reason that the Japanese yen is so important for investor sentiment is that it is used in the so-called "carry trade". Essentially, investors borrow the yen (short) in order to finance higher risk investments. If the USDJPY exchange rate is dropping that means traders are covering their short yen position and moving out of riskier investments like stocks.

Like the ATR indicator, today's movement in the yen doesn't disqualify the rally, but we need to see more follow-through before expecting the rally to continue. In both cases, confirmation could occur next week. The reason technicians will monitor exchange rates and indicators like this is to evaluate the level of risk in the market.

Read more:

Forex Trading For Beginners

What is a Safe-Haven?

Millennials Load Up on AAPL

Bottom line: Looking Forward to a Slow Week

There isn't a lot of economic and earnings news scheduled for next week. However, traders will be preparing for earnings season, which won't really be kicked off until the big banks start to report during the week of the 15th. So far, there have been some warning signs that analysts may have overestimated corporate profits in the fourth quarter. The FedEx (FDX) earnings report and Apple's (AAPL) surprise have put traders on edge. Having a week of few reports, and less news, could be just what we need for traders to settle down and reset in favor of positive expectations.