Those of you who were trading through the Financial Crisis of 2008 and the subsequent rebound on Wall Street will remember an interesting period where every day felt like an opposite day. Whenever bad economic news would come out, stocks would jump higher. Conversely, whenever good economic news would come out, stocks would slump lower.
On the surface, this market action seemed crazy. Why would traders push stocks higher on bad new? However, when you dug a little deeper, everything made sense.
Traders were hoping the Federal Open Market Committee (FOMC) was going to boost its economic stimulus program with quantitative easing (QE), and they knew the FOMC was more likely to inject money into the economy if the economy was doing poorly. So traders were translating every bit of bad economic news as one more reason the FOMC would ultimately have to take action.
I think we're seeing the same thing happening again. I've been talking all week about the growing belief that the FOMC is going to cut rates earlier than previously anticipated and that there may even be multiple rate cuts in 2019.
This belief has been stoked by fears of a slowing economy, and those fears were confirmed this morning when the Bureau of Labor Statistics (BLS) released its nonfarm payrolls number. Analysts were expecting the BLS to announce that the U.S. economy had created 177,000 new jobs during May. Unfortunately for workers, the U.S. economy only created 75,000 new jobs last month.
For traders, on the other hand, this was great news because it puts more pressure on the FOMC to take action to try and stimulate the economy. All eyes will now be on the FOMC as it meets for its next monetary policy meeting on June 18-19.
The S&P 500 jumped to an intra-day high of 2,884.97 on Friday before pulling back to settle 1.05% higher for the day at 2,873.34. The bullish move brought the index back up in line with the resistance level that formed the right shoulder of now-invalidated head and shoulders bearish reversal pattern the S&P 500 completed on May 29.
The largest stocks in the S&P 500 drove most of Friday's bullish momentum. Facebook Inc. (FB) climbed 2.98%, Amazon.com, Inc. (AMZN) rose 2.83%, Microsoft Corporation (MSFT) jumped 2.80% and Apple Inc. (AAPL) bounced 2.66%.
The only two sectors to experience broad pullbacks were the Financial and Utilities sectors. Financial stocks, like Bank of America Corporation (BAC) and JPMorgan Chase & Co. (JPM) – which dropped 1.25% and 1.10%, respectively – fell as Treasury yields continued to drop, putting pressure on net interest margins. Utilities stocks, like PPL Corporation (PPL) and The AES Corporation (AES) – which lost 1.59% and 1.53%, respectively – dropped as traders moved away from the safety of defensive stocks and back into large technology stocks.
I'll be eager to see if the S&P 500 can continue climbing next week.
Risk Indicators – Gold
You might think that during a week like this all traders would be focusing 100% of their attention on the stock market. After all, it is soaring higher. However, traders don't seem to be as confident as the bullish performance of the S&P 500 might have you believe.
While the S&P 500 has been cruising higher, the price of gold has been establishing a new 52-week intra-day high. This is notable because the S&P 500 and gold typically have an inverse correlation. When stock traders are confident and pushing the S&P 500 higher, the price of gold usually declines. Conversely, when stock traders are worried and pushing the S&P 500 lower, the price of gold usually rises.
Seeing both rising at the same time tells me that traders are looking to maintain a bullish equity position in their portfolios, but they also want to increase their diversification into safe-haven assets – like gold – to protect themselves just in case the stock market takes a nosedive.
This is a distinct reversal from what we were seeing with gold in mid-April, when the commodity formed a head and shoulders bearish reversal pattern. That pattern was initially invalidated on May 13 when the price of gold rose back above the uptrending support level that served as the "neckline" of the reversal pattern.
Now after two solid weeks of price increases, gold has broken above the intra-day high that formed the "head" of the previous reversal pattern on Feb. 20. If gold continues to move higher, watch for resistance to develop in the stock market.
Bottom Line - What a Week
This has been an incredible week in the stock market. Let's enjoy it while we can, but we need to be prepared for more volatility this summer.
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