Stocks Are Technically Breaking Out


June 6, 2016, 4:00pm EST

We talked last week about the employment data.  It was broadly thought to be disappointing. Even though the headline unemployment rate dropped to 4.7%, the job creation number was weak.

So stocks fell sharply following Friday’s numbers.  The dollar fell. And Treasuries rose (yields lower).  All of this immediately priced in a gloomier outlook and a Fed that would hold off on a June rate hike.

But remember we discussed how market professionals are trained to hyper-focus on the jobs numbers, even though the jobs numbers are far less important than they are in “normal” times.  And with that, we said “it’s probably a good idea to use those moves as opportunities to enter at better levels (i.e. buy stocks, buy the dollar, sell Treasuries).”

That’s played out fairly well today, at least for stocks (the dollar is mixed, yields are quiet).  Stocks have recovered and surpassed the pre-employment data levels of Friday morning.  Small cap stocks are now trading to the highest levels of the year.

Remember, in the past two weeks we’ve talked about the similarities in stocks to 2010.  Through the first half of this year, we’ve had the macro clouds of China and an oil price bust that shook market and economic confidence.  Back in 2010, it was Greece and a massive oil spill in the Gulf of Mexico.  When the macro clouds lifted in 2010, the Russell 2000 went on a tear from down 7% to finish up 27% for the year.  This time around, the Russell has already bounced back from down 17% to up 4%.  And technically, it looks like stocks could just be breaking out.

Below is a look at small caps (the Russell 2000).


Source: Reuters, Forbes Billionaire’s Portfolio

You can see the long term trend dating back to 2009 is still intact following the correction earlier this year.  And the trendline that describes the correction has now broken.

As for broader stocks (the S&P 500), the chart looks intriguing too.


Source: Reuters, Forbes Billionaire’s Portfolio

Similarly, the trend off of the bottom in the S&P 500 is clear, and a breakout toward new highs looks like it is upon us. New highs in stocks would get a LOT of money off of the sidelines.

What about valuation?  See our recent piece on What Warren Buffett Thinks About Stock Valuations.

With all of the above said, Yellen had a chance to respond to the Friday jobs number today, through a prepared speech for the World Affairs Council of Philadelphia.  She downplayed the Friday numbers, highlighted the passing of global risks from earlier in the year, but she did note the Brexit risk (the coming UK vote on leaving/staying in the EU).

With that, perhaps they will use the market sentiment adjustment from the jobs data to their advantage, to justify passing on a June hike in favor of July.

That would give them a chance to see the outcome of the UK vote, and perhaps give them a chance to hike into positive momentum created by another round of stimulus from the BOJ (a possibility next week).  Waiting another month is a low risk move.  But again, we think the UK leaving the EU can’t happen/won’t happen – maybe down the road, but not now. Despite the popular polling reports, the experts are assigning a low probability.  Plus, there has already been clear political messaging attempting to influence the outcome, and we expect that will increase dramatically as the vote approaches (June 23).

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