Friday's Wake Up Warning For The Bulls

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In May the employment report was the biggest job creation miss below expectations ever.
Stocks responded by rallying to new highs. Bonds also rallied.

That Friday also set all-time closing highs in the SPY and DIA that hadn’t been eclipsed until yesterday.

Yesterday, the employment data came in shy of expectations again.

Again, stocks and bonds rallied leaving the SPY and DIA at virtually the same all-time closing high level as the last month’s report.

Recently, the market’s pattern seems to be that the bulls find a reason to run the market up leading up to, and on the day of, the employment data. This makes sense coming out of a recession when it’s natural to expect stronger economic and employment data.

Likewise, the market has spent the last several months rotating out of the big tech theme, and into the cyclical recovery themed stocks. This makes sense considering a very visible path to a widespread reopening of the pandemic economic shutdown.

On the surface, the market seemed to shrug off Friday’s second month of lower than expected job growth, but this is how markets catch complacent investors by surprise while at the same time leaving clues of a change of heart developing.

These two misses suggest the current economic recovery isn’t developing as expected!
The rise in bonds, and the basing pattern in the TLT, may suggest we may soon see a change of heart to a more bullish view of bonds.

I agree, a bond rally is hard to believe if inflation is on investors’ mind, but don’t dismiss it completely, because…

If investors start to believe that the economy is beginning to stall rather than beginning to accelerate, this will be a surprise that won’t likely lead to “buy the dip” higher stock prices at the current levels.

At the very least, it’s likely to lead to some very big sector rotation and market volatility.

Early signs of such a change of heart could be behind the recent strength in the semiconductors (SMH), and the recent weakness in housing stocks (XHB) and the transportation sector (IYT).

These three sectors are worth watching in terms of how they respond to the flow of economic news.

The market is great at making the unexpected look obvious in hindsight, and with that in mind, the employment data should be a wake-up warning that this economic recovery is most likely not going to unfold “as expected.”

On a more actionable note, the stock market often has a change of heart after a big data-driven day like we had Friday.

You may recall, or you may have recognized this week’s image as being, the Monday following the May employment report, which began a pretty ugly decline in stocks.

Beware of short-term weakness if the major indexes trade below Friday’s Floor Trader Pivot levels, or worse, under Friday’s low.

This week’s market highlights:

• Risk Gauges remain in a neutral reading.
• Real Motion has a negative divergence in the SPY, QQQ and IWM on a 50 vs. 200-day basis. This indicates that the momentum is not bullish, despite the SPY sitting near all-time highs.
• TLT had a notable rally off its 50-day average on Friday, and it has had a bullish Real Motion divergence for weeks.
• The financials (XLF and KRE) didn’t react to the strength in the bonds.
• XLE and USO had very both had a strong week.
• IYT was weak on Friday and for the week.
• Irrational speculative fever is still alive as demonstrated by the price action in AMC which more than doubled on Tuesday, then gave most of its gains back at its low point on Wednesday.
• ILF, the Latin America ETF had a big week rallying over 7% and breaking out over its 200-week average, a pivotal level of 30, and a trendline from 2018 highs.
• GLD sold off substantially below its 10-day average on Thursday before rebounding to the average on Friday. Next week could be pivotal for its current uptrend.
• Market internals are healthy.
• SMH led the NASDAQ rally on Friday and is closing in on its all-time highs.

This week's highlights in the Cryptocurrency Industry:

• This week saw the Bitcoin 2021 Conference take place in Miami, the US home for crypto innovation and blockchain implementation backed by the local government and the city's Mayor Francis Suarez. Constant announcements from politicians, corporate executives, and crypto/blockchain creators dominated the news, and potentially influenced this week’s success of the technology and semiconductors sectors in the market.
• El Salvador became the first country to announce the full adoption of Bitcoin as a currency, partnering with virtual wallet provider, Strike, to aid in rebuilding a modernized financial system using blockchain technology.
• Elon Musk is still at the forefront of the crypto news cycle, however, now receiving major backlash from retail investors worldwide for his repeated tampering with the crypto market through obscured and ambiguous tweets.
• BTC saw about a 1% drop over the course of the week, still fighting to get back over the 200 DMA.
• Bitcoin and Etherem, the two leading coins by market cap, continue their consolidation patterns, with investors worldwide wondering if this pattern will emerge with a bullish breakout, or a retest of recent lows.
• Many analysts have discussed BTC's correlation with the Wyckoff distribution pattern in recent months, and are pointing out that the price action of the coin is reaching the end of this pattern, hopefully indicating an impending recovery.

There isn't a video this week.