Employment Situation Surges Stocks: January 30 - February 3

January was a big plus month for stock prices. In fact, the rally has ranked as one of the more progressive stock rallies seen in any January. We are extremely overextended making me very suspicious that February will be an entirely different environment. I want to emphasize that the month of January has not seen any sustained sell programs. A very high-overbought reading on the daily Cook Cumulative Tick (CCT) has been indicated. If at any moment a negative catalyst is introduced to this market, it is very susceptible to a sharp price correction. On Monday, the tale of the tape was gradual erosion with sustained selling. The early erosion broke through 1300 with continued failed rallies. The tape changed as midday arrived and we saw a rescue mission carry prices 14 points above the morning lows. An instance of a plus 1200 NYSE tick was registered. Rarely does a slow erosion in the morning turn into a euphoric high plus tick in the afternoon. It was as if it was two different days of trading.

Since the FOMC announcement, the bonds have experienced almost a full 5-point rally. This is not normal activity. An aberration is forming in the internal of this market. The only way this can happen is by a powerful buyer maintaining his presence--AKA, the Federal Reserve. Notoriously they will flip off the buy switch and orchestrate a quick and sharp decline.

Bull markets require institutional activity to sustain. The institutions are like a beefy pro linebacker that is all over the football field with activity surrounding the ball. Institutions represent the beefy linebacker, as they generally are a hubbub of activity especially in bull markets. That was not the case Wednesday, which makes me think that the breath is not sufficient enough to carry prices and maintain them.

The S&P probed into resistance again at just shy of 1330--last week’s highs. Generally, the first day of the month has an infusion of cash that pushes prices upward, so these price moves aren’t surprising. The bonds had a dreary start to the month with a trend down day. It culminated with a full one-point reversal from the day’s highs. Moreover, a higher high than Tuesday was not made, so our entry point to be short did not occur.

In Forex trading, the Euro was the main mover in the FX market with the S&P downgrades and Greece bailout fears causing a sell off. The U.S. Dollar showed strength while facing Eurozone concerns. Any attempts to rally were sold into and more bad news continued to emerge. On Friday night S&P downgraded several European countries. The US stocks attempted to rally even as the debt crisis carried on. Weekly jobless claims spiked to 399k from 375k. However, Consumer Sentiment improved to 74 from 69.9.

Thursday, it was Groundhog Day and will we have 6 more weeks of winter? This is a traditional day in the Midwest, especially in Ohio and Pennsylvania. If the groundhog sees his shadow, we will have six more weeks of winter. If not, winter is over. I think this market is in a similar situation of transition. It had one of the tightest daily range days I’ve seen in a while. The bulk of intraday trading was done within a five-point range. The absence of high plus or minus NYSE tick denotes decreasing participation by the institutions.  There was minimal activity, however, the advisory trade was able to reach it’s profit objective! Overall volatility was so benign that trading for larger swings was virtually impossible. Be careful whenever there is tightness. It may look harmless, but it will give way to sharp volatility.

The bonds are following the same type of pattern of tightness that equities are. However, they have diverged from the general normal indirect correlation between the S&P futures and the bond futures. The intermediate term for the S&P set up one of my favorite swing trade environments--the box. Volatility is generated once the box is completed. There was a floor at 1300 and a ceiling at 1330 with the majority of the trading inside these numbers. A keen market watch was not necessary to see how this box was eventually destroyed!

Unexpected market news items can become catalyst to move a docile market into volatility. Traders were wary prior to the employment report Friday. But it registered a better than expected reading for the economy! The unemployment rate decreased to 8.3% and it amped stocks up immediately upon the announcement. The rest of the day shattered previous resistance and maintained the gains.

To all the football fans out there, hope you have a superb Super Bowl weekend!