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Strong Non-Farm Payroll Report Spooks Sensitive Investors

Stock Tips by Marc Chaikin

The S&P 500 Index closed on Friday at 2,071, down 1.58% on the week. The Nasdaq Composite and the Russell 2000 small cap Indexes declined as well, but less than the S&P500. After making a new closing bull-market high on Monday, the S&P 500 traded poorly for the balance of the week, culminating in Friday's high volume decline.

The S&P 500 closed below support at 2,085 and is vulnerable to further short-term declines down to 2,000-2,050. The reason for Friday's decline was the fear of an earlier than hoped for rise in interest rates by the Federal Reserve Board. This knee jerk reaction to the strong and better than expected non-farm payroll report that showed the U.S. adding 295,000 jobs last month was probably an over-reaction.

However, breaking support on high volume should never be ignored, particularly in the short-term. Utility stocks paid a steep price as has been the case since 10 year Treasury yields began climbing in mid-January.

We are in a rather unusual market climate where projections of lower corporate profits for the S&P500 in the 1st and 2nd quarter of 2015 don't seem to spook the market, but job growth does.

The impact of interest rate hikes and a strong U.S. dollar

To reiterate what we have been saying for months, the first rate hike from the Fed is almost always followed by rising, not falling stock prices. Expect more of a bumpy road ahead with a decline of 1-3% likely from current levels.

The continuing strength of the U.S. dollar is a major plus for U.S. stocks. Not only are U.S. government debt yields significantly higher than their European counterparts, but the strength in the dollar, while a negative for U.S. multi-national companies does reflect the strength of the U.S. economy and the relative effectiveness of the various Federal Reserve Board quantitative easing programs. All of this is bullish for U.S. equities and suggests that the flow of foreign capital into the U.S. debt and equity markets will continue unabated in 2015.

Don't chase stocks, but use weakness to buy bullish Power Gauge stocks in the Consumer Discretionary, Technology and Health Care Sectors. Bank stocks should do well if the market continues to believe that a June interest rate hike is probable, particularly the regional banks.

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