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Unemployment, Earnings & Sector Outlook

|Includes:SPDR S&P 500 Trust ETF (SPY), SPY

Despite Friday’s rebound, the move didn’t pull the market that deep into the black for that day, and certainly didn’t undo the damage for the week. The S&P 500, for instance, gained 0.3% for the week, but ended the week in the hole by 0.7%.

The question is, was Friday’s strength a glimpse of what’s to come, or just a dead-cat bounce following Thursday’s and part of Friday’s action…. a 4.9% swing from the high to low of those two days. The volatility was no real surprise though, considering Thursday’s disappointing jobless claims data, and then Friday’s better-than expected unemployment rate.

Let’s just begin there.

Economic Calendar:

This week shouldn’t be as busy as last week on the economic front, with less than half the number of economic announcements slated. The big ones to watch are the claims data on Thursday, and the retail sales data – also on Thursday.

As for last week, check out the economic calendar below… it was quite the mixed bag.

020710-econ-calendar

Noteworthy items include the fact consumer credit didn’t shrink nearly as much as thought. In fact, it barely shrunk at all. That’s something to keep on the radar. Pending home sales were actually up for the month, for the first time in ever. Also something to keep an eye on.

The big enchilada, however (and we have a chart of it below), was the way the media has handled new and ongoing jobless claims. Both were higher than expected, as they pretty much have been the last five weeks. The basic media interpretation was gloom and doom – there’s no way the economy can be getting better unless the jobless claims are sinking, right?

Yeah, well, the long-term chart of both ongoing claims and continuing claims is a real eye-opener. Say what you want, but both are trending lower. Over the last five weeks, they haven’t. Over the last five months though, they have.

Were either chart below a stock or index or any other data set, any casual onlooker would say they’re trending lower. Since the story is so much more sensational when the employment glass is seen as half-empty though, the bigger trend took a back seat.

Not that the move in the unemployment rate from 10.0% to 9.7% on Friday is evidence of anything spectacularly optimistic, but it certainly flies right in the face of last Thursday’s hysteria. The point is, this is why we use charts, and this is why we ignore much of what the media says. They’re just selling ad space; they don’t have to be right.

Anyway, here’s the chart of new claims, ongoing claims, and the unemployment rate.

020710-claims

S&P 500:

This may be the shortest look we’ve taken at the S&P 500’s chart all year. Why? After Friday’s strong reversal, there’s no real clear picture about what the coming week holds.

On the bullish side of the equation, the strong reversal action after such a drastic pullback suggests the selling is over. We saw hammer formations from the major indices, and we saw an upside-down hammer from the VIX right as it touched the upper Bollinger band. All are hints of significant reversals.

On the bearish side, after falling a whopping 4.9% between Thursday’s high and Friday’s low, what did you expect? If you drop anything from high enough, it’ll bounce…. at least for a while. What remains to be seen is whether or not the bulls will give us any follow-through.

So, before making any rash decisions in the shadow of what is – frankly – a price shock, we suggest letting the dust settle. Just for the record, our Trader’s Edge outlook remains slightly bearish overall, somewhat anticipatory that Friday’s confidence can’t actually be delivered on by stocks in the foreseeable future. It may take a few days, however, for the market and confidence to find its appropriate balance again.

That’s our long way of saying now’s not the time to be making any big bets.

Sector Outlook:

Believe it or not, some groups actually did manage to end the week in the black… technology and basic materials. While basic materials stocks are still likely being pushed around by speculation surrounding inflation and whether or not we’re actually in an economic recovery, tech stock have been resilient, as their underlying companies has been impressive in terms of earnings. The technology sector may well be in their own, true cyclical bull market.

On the losing side of the table you’ll find utilities and financials. Despite the loss, the former represents a long-term opportunity from an undervalued group. The latter – the financials – are likely losing simply because of an excessive runup in 2009 that can’t be justified now. There are solid individual opportunities in the financial sector right now, but there are too many individual problems in the group to like the group as a whole.

020710-sector-rank

Earnings Calendar:

The number of earnings reports is starting to slow down, but there are still plenty enough to shake the market up. Here are the biggies on tap for this week.

020710-earnings

Trade Well,

Price Headley
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Stocks: SPY, SPY