Employment Surprise

Last week Digest Issue 18 "Not Enough Surprises [Charts]" suggested the lack of response to better than expected earnings reports by widely followed big-cap technology favorites surprised very few since the good news was already in their stock prices. However, Friday's report of less than expected job gains of only 266K qualified as a surprise and the markets responded, although perhaps not the way some may have anticipated. The Market Review fills in the details.

S&P 500 Index (SPX) 4232.60 came alive last week adding 51.43 points or +1.23% making a new closing high and new intraday high at 4238.04 on Friday. Apparently, the weaker than expected employment report means reduced pressure on the Federal Reserve to begin considering a change to their current ultra-loose monetary policy giving markets, both bonds and equities, the green light.

With both initial unemployment claims and unemployment benefits declining, Friday's employment report of 266K seems out of line. Some analysts claim the report was an anomaly due to seasonal adjustments and will likely be revised upward with the May report since no other related indicators agree with this surprisingly low number.

The trading range near 4200 that began on April 16 and ended with Friday's breakout should provide support on any near-term pullback followed by the area around 50-day Moving Average at 4033.53 should it continue lower.

CBOE Volatility Index® (VIX) 16.69 dropped 1.92 points or -10.32% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, slid 2.04 points or -13.96% to end the week at a 52-week low of 12.57%. The six-month chart below shows the renewed downtrend that began with the spike up in late January. Consistent with new SPX highs declining the IVXM (orange line) confirms the bullish outlook.

VIX Futures Premium

VIX futures premium with May the front month, ended the week at 15.72% in the green bull zone, vs.13.58% for the week ending April 30, also in the green bull zone. May futures expire on May 19 with May 18 the last trading day.

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, slowed down in the middle of the week, but turned higher again on Friday.

For the week, it gained 11.72 points or +1.59% ending at 750.41, pulling away from the downward sloping 50-day Moving Average at 640.64. From a trendline perspective, a change in trend appears underway.

For those who may have missed our introductory IVolLive New Feature Webinar on February 23, now have a chance to see the rerun. Take a look and then send any questions to [email protected]

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Watch the rotation out of big cap high valued tech stock favorites into cyclicals now included the broad group called "reopening stocks" as the battle between the "buy the dippers," who have been right for a long time, confront institutional selling in a process called distribution that the late market guru Joe Granville once called unloading to the "bag holders." With large positions, this Wall Street adage helps explain the process. "Sell when you can, not when you have to." 

Summary

On Friday the S&P 500 Index opened higher and advanced into new high territory again on likely reduced pressure on Jay Powell at the Federal Reserve to take some tightening action after the weaker than expected employment report. While both bonds and equities cheered the news, the euphoria could be short-lived if the report turns out to have been an anomaly due to seasonal adjustments. In the meanwhile, both the futures and options indicators remain bullish.