The stock market fell sharply Thu and Fri before and after the employment reports Fri morning. The Nonfarm Payrolls report showed 207,000 net jobs were added in July, which were 27,000 more than the market expected. Also, Hourly Earnings in July rose 0.4%, which was twice what the market expected. There's a strong inverse relationship between employment and profits, in part, because when employment increases, then productivity falls, which generally lowers profit growth. Moreover, some proportion of additional labor costs tend to come from profit growth when there is little slack in the economy. Furthermore, lower productivity is inflationary, ceritus paribus (all else equal).
Employment is a lagging indicator. The Unemployment Rate is currently 5.0%, which is considered to be the natural rate of unemployment, where there is an optimal balance of labor and leisure. A lower unemployment rate would indicate strain in the labor market, which would drive up wages. So, there is some concern for slowing profit growth and rising inflation, e.g. a wage-price spiral, although there have been signs of disinflation recently. Nonetheless, U.S. monetary policy is still accommodative, and the Federal Reserve will need to remain vigilant to preempt inflation.
Consequently, the stock market may have reached a short-term top last week, and may consolidate for a month or two. July-August-September is the seasonally weak period for the stock market. The chart below shows SPX rallied about 110 points over a 3 1/2 month period. The two big down days Thu and Fri were on lighter volume, which may indicate a trading range next week. SPX hit a high at about 1,246 last week, and 1,253 is a multi-year Fibonacci resistance level that may not hold for at least several months.
SPX closed at about 1,226 1/2 Fri. Short-term resistance is at the 20 day MA, currently about 1,231 1/2, last week's pre-Friday low at about 1,235, and the 10 day MA, currently just over 1,236. If SPX rises into that area early next week, that may be an opportunity to buy Sep puts. If SPX rises higher, e.g. to test the recent high or multi-year Fibonacci level, that may be an opportunity to buy Aug puts (SPX options expire in two weeks).
SPX is currently in a support zone, i.e. the congestion area over the past few weeks when it held the 10 day MA, and the long Price-by-Volume bar at around 1,225 (on left side of chart). Other short-term support levels are the open gap at 1,221, the 50 day MA, currently about 1,213 1/2, and the longest Price-by-Volume bar at around 1,200. If SPX fails to hold the 200 day MA, e.g. in Sep, then it may close the gaps at 1,174, 1,143, and 1,138.
Next week economic reports are: Mon: None, Tue: Productivity, Wholesale Inventories, and the FOMC announcement, Wed: Treasury Budget, Thu: Retail Sales, Unemployment Claims, and Business Inventories, Fri: Export & Import Prices, Trade Balance, and Michigan Consumer Sentiment. The FOMC is expected to raise the Fed Funds Rate another quarter point to 3.50% Tue. I believe the FOMC will continue to tighten the rest of this year, until monetary policy reaches a neutral stance (perhaps 5% Fed Funds Rate). The weekly oil inventory report is Wed.
Chart available at PeakTrader.com Forum Index Market Overview section.
Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.
Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time. This methodology has resulted in excellent returns with low risk over the past three years.
Are you as good an investor as you think? Do... Read More
"To drift is to be in hell, to be in... Read More
Looking Inside Your Tenant's Mind Basic Mind-Reading Report 101 for... Read More
A significant number of corporations that settled accounts in the... Read More
Let's see, he had some oats, fresh alfalfa and his... Read More
Soft dollars, a form of legal kickback, is a sly... Read More
Press releases are a means through which companies can keep... Read More
If you know next to nothing, how do you go... Read More
If you want to make the most of your personal... Read More
By definition, value investing is the process of selecting stocks... Read More
Setting Up a Paper Trading AccountQuestion: I cannot trade with... Read More
Over the course of the past two months, readers have... Read More
Do you think you need an Investment Advisor? Hold on... Read More
They're real, but few survive. High risk investing is dangerous... Read More
How do you make your investment decisions and where do... Read More
All this talk about Investing is encouraging lately. Over the... Read More
Here are some useful tips on investing. When you make... Read More
If you are new to investing online, don't put your... Read More
Rich people: fortunate, lucky, selfish, and arrogant? Or highly educated,... Read More
Every year I go to the Money Show in Orlando,... Read More
Investments can be a source of great potential earnings. The... Read More
Once upon a time, offshore investment strategies were spoken of... Read More
Financial Spread Betting (or Trading) offers a tax free method... Read More
The communication innovations we have around us today like the... Read More
If you are interested in stock investing and the stock... Read More
Gearing is where you borrow money to invest. As already... Read More
For investors only... and for speculators who need to invest... Read More
There are a number of key reasons why individuals and... Read More
(Please have a glass of water within reach before reading... Read More
To create momentum in your options trading you need to... Read More
In the last two decades, even though gold prices have... Read More
Ready to start playing with your money? Not interested in... Read More
Six or seven years ago, the stock market was booming,... Read More
Over 80% of all individual investors lose money in any... Read More
"The American Age of Inflation is finished." So says economist... Read More
"All human power is a compound of time and patience!"... Read More
Can you concisely summarize your investment philosophy in a few... Read More
Firing an employee seems to be easier and easier for... Read More
Some time ago I attended a seminar where participants were... Read More
You don't HAVE to be trading.As a novice trader, you'll... Read More
Leaders are stocks that breakout immediately when the market confirms... Read More
Pre-1933 Gold Outperforms Today's Gold Bullion...Since 1970, an investment strategy... Read More
The syntax is tortured, the grammar mutilated, but the message... Read More
Ready to start playing with your money? Not interested in... Read More
The first point to mastering money management is that you... Read More
First and foremost, an opportunistic strategy for creating wealth in... Read More
No matter how much money you make, it pays to... Read More
Penny stocks and options are high volatility investments that attract... Read More
You are 55 years old (or somewhere around there) and... Read More
FOREX, the term for the FOReign EXchange market, is an... Read More
In many respects, Singapore is the Switzerland of Asia.Begun in... Read More
The Moving Average Convergence Divergence charts, or MACD charts for... Read More
If you are doing your own investing in the stock... Read More
For those accustomed to viewing things a certain way, it... Read More
There has been much talk lately about Coca-Cola and its... Read More
Agonizing displays of poor theatrics failed to entertain my mind... Read More
The trading method you employ to approach the stock market... Read More
Tropical Storm Arlene formed as a tropical depression on June... Read More
There are three important differences between investing and trading. Overlooking... Read More
Arthur Levitt, during his tenure at the SEC, experienced many... Read More
I had the pleasure of being invited on a friend's... Read More
In 1519, Hernando Cortes, beached on the shores of unexplored... Read More
This column has previously discussed "picturing the future that we... Read More
While a U.S. Representative to the Asian Development Bank Executive... Read More
Do you ever wonder exactly what's going on in the... Read More
A SEP is a special type of IRA. Under a... Read More
Investing |