Major Moves 

It was a half day in the market today that ended with big gains for bulls and another all-time record close on the S&P 500. I don't know if I can fully explain today's exuberance, but as I look forward to the Bureau of Labor Statistics' (BLS) unemployment report, I think I might have a theory.

Over the past 10 years, a positive BLS report (above 200K jobs) has been followed by positive 30-day returns on the S&P 500 a little more than 70% of the time. Negative reports (less than 100K jobs) have a nearly random relationship with the returns of the next 30 days, unless we adjust that sample for one small difference.

If the report is negative and the Fed is engaged in monetary easing (e.g. cutting rates), then the market has been higher 30 days later 80% of the time. The Fed hasn't cut rates yet, but the market is pricing in a nearly 100% chance that it will do so in July, so I think this qualifies as a period of easing.

Traders may be rushing to get into the market before the report on Friday morning to take advantage of the likely rally reaction. It's one of those situations where good news is good news, and bad news is good news because it means the Fed will continue to ease. You can see an example of what I mean from 2012 in the following chart. The BLS reported a measly 69K new jobs that May. This was just before the Fed launched its third round of quantitative easing (QE-III).

There is one more small caveat to these stats: the gains after a bad report are usually accumulated in the first week after the data has been released. The reaction in 2012 was sort of an outlier in that respect. That means prices may be at even higher highs just as the big bank reports are due to release second quarter earnings in two weeks.

Chart showing the gains in the S&P 500 Index after the BLS report in 2012

S&P 500

As I mentioned, the S&P 500 reached a new all-time record close today, which was not matched by small caps or transportation stocks. According to Dow Theory, we still want to see transports (or at least small caps) reach a new high as confirmation before counting on much bigger gains from the S&P 500.

I suspect that much of the reason the S&P 500 led the other indexes today was the news that Christine LaGarde (former head of the IMF) has been nominated to lead the European Central Bank (ECB). LeGarde is considered a monetary dove, and large multinationals in the S&P 500 are better positioned to take advantage of that than most small caps.

Her nomination will probably not help the U.S. trade deficit – the ostensible reason for the "trade war" – which hit a five-month high today. That will be an issue for U.S. investors to watch carefully.

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Chart showing the performance of the S&P 500 Index

Risk Indicators – Currency Save Havens

From a risk perspective, I am still looking for signs that the outlook is improving from the trend of safe-haven currencies. As I mentioned in the Chart Advisor last week, the Japanese yen (JPY) is a good proxy for risk appetite because it is borrowed to fund the purchase of riskier assets. This is part of the so-called "carry trade" in the forex markets.

If I neutralize the impact of the U.S. dollar's recent fluctuations, the yen is still looking very strong. In the following chart, I have crossed the JPY with the British pound (GBP), where the negative trend indicates that the JPY is gaining against the GBP because it costs fewer, stronger, JPY to buy a GBP. This same comparison is consistent with other reserve currencies compared to the JPY as well.

If investors shift to a more confident outlook, we would expect to see the JPY weaken. It isn't impossible for the market to rally on a stronger JPY, but it would be unusual. The exchange rate cross is flirting with support in the 135.70 range, which could turn into a pivot point next week. If that is the case, I think the outlook for July will be improved.

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Performance of the British pound (GBP) vs. the Japanese yen (JPY)

Bottom Line – Earnings Expectations Are a Low Bar

Although the labor report and potential trade news on Friday are important, earnings will soon dominate the forecasts for this summer. The big bank reports are scheduled to begin the week of July 15, and by the following week, the outlook for earnings should be easy to estimate.

I think there is still cause for some optimism that stocks can sustain their highs. Zacks Research is reporting an estimated decline of 2.9% in earnings for the second quarter, which is a low bar. It wouldn't take much for the outlook to shift more positively if guidance and/or results are able to beat those lowered expectations.

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