The market’s initial reaction to another dismal jobs report – including a spike in the unemployment rate to a five year high of 6.1% – was easily overcome by the end of the day as heavy selling from earlier in the week had already punished equities. The late afternoon buying from Friday prevented the major indices from testing their 52 week lows – for now.
Most noteworthy about this latest sell off is the cause. For once, the financials did not cause a collapse in equities. In fact, over the last 5 trading sessions the XLF is up 2.5% while the S&P 500 is down 4%.
This is very important and suggests any further sell off – and subsequent recovery – will look at lot different than the November (2007), January and June market declines.
Those declines were caused by widespread fear that the credit crisis would continue to wreak havoc on the global financial system. For the first time, these fears may be diminishing. Take a look at AIG and MER. Both stock’s were downgraded yesterday and still finished much higher on the day. You can’t deny this price action. And late reports from Friday that FRE and FNM would be backed by Treasury may cause financials to spike again next week. Remember, each time the government has stepped in to aid our financial system – the emergency 75 point basis cut in January, the BSC bailout and the imposed restrictions on shorting many financial stocks – equities began rallying for weeks.
So, if it wasn’t the financials, what caused this latest sell off? It’s the perception that the world economy is in recession. Commodities and commodity stocks are dropping because investors believe demand is waning for oil, steel, copper and other materials. This is why machinery stocks like TEX, JOYG and FWLT were thrashed this week. The world slow down has also been interpreted as weak for technology stocks. This has dropped the NDX 8% in two weeks.
Though the trend is now unmistakably down, we may have a positive trading week coming soon. In addition to the added support to FRE and FNM, many stocks were able to spike off support levels and finish much higher on Friday. Two examples are RIMM and FCX.
Extreme sell offs in these names pushed each stock down to previous levels of support (RIMM $102 and FCX $70). They now appear ready for a short term bounce.
And for the bulls, that is the best you can hope for right now. Other than the safety stocks – WMT (finally closed well bove the $60 resistance on big volume), GIS, CLX, JNJ, PG, MCD and a few others – you’d be hard pressed to find a group that os trending higher at the moment. But if we see the XLF break out above the $23 level, we may begin to see some real leadership this market is in desperately searching for.
