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May's employment report was the biggest miss below expectations. Stocks responded by rallying to new highs, and bonds also rallied. Friday also set all-time closing highs in the SPY and DIA, which hadn’t been eclipsed until recently.

Recently, the market’s pattern seems to be that the bulls find a reason to run the market up leading up to, and on the day of, the employment data. This makes sense, as we are coming out of a recession and therefore it’s natural to expect stronger economic and employment data. Likewise, the market has spent the last several months rotating out of the big tech theme, and instead into the cyclical recovery-themed stocks. This makes sense as well, considering the very visible path to a widespread reopening of the economic shutdown.

On the surface, the market seemed to shrug off Friday’s second month of lower-than-expected job growth, but this is how markets catch complacent investors by surprise while at the same time leaving clues of a change of heart developing.

These misses in job reports suggest the current economic recovery isn’t developing as expected. The rise in bonds, as well as the basing pattern in the TLT, may suggest we could soon see a change of heart to a more bullish view of bonds. Early signs of such a change of heart could be behind the recent strength in the semiconductors (SMH), and the recent weakness in housing stocks (XHB) and the transportation sector (IYT).

These three sectors are worth watching in terms of how they respond to the flow of economic news. The market is great at making the unexpected look obvious in hindsight, and with that in mind, the employment data should be a wake-up warning that this economic recovery is most likely not going to unfold “as expected.”

On a more actionable note, the stock market often has a change of heart after a big data-driven day like we had on Friday. Beware of short-term weakness if the major indexes trade below Friday’s Floor Trader Pivot levels, or worse, under Friday’s low.

Here are this week’s market highlights:

• Risk Gauges remain in a neutral reading.
• Real Motion has a negative divergence in the SPY, QQQ, and IWM on a 50-day v.s. 200-day basis. This indicates that the momentum is not bullish, despite the SPY sitting near all-time highs.
• TLT had a notable rally off its 50-day average on Friday, and it has had a bullish Real Motion divergence for weeks.
• The financials (XLF and KRE) didn’t react to the strength in the bonds.
• XLE and USO both had a strong week
• IYT was weak on Friday and for the week as a whole.
• Irrational speculative fever is still alive, as demonstrated by the price action in AMC, which more than doubled on Tuesday, then gave most of its gains back at its low point on Wednesday.
• ILF, the Latin America ETF, had a big week, rallying over 7% and breaking out over its 200-week average, a pivotal level of 30, and a trendline from 2018 highs.
• GLD sold off substantially below its 10-day average on Thursday before rebounding to the average on Friday. Next week could be pivotal for its current uptrend.
• Market internals are healthy.
• SMH led the Nasdaq rally on Friday and is approaching its all-time highs.