Great News + No Action = Be Selective!

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Prepared by Geoff Bysshe, President of MarketGauge, filling in for Mish until December 8th

The media will focus on the record closes in the S&P 500 and the Dow, as the markets reaction to the biggest increase in payrolls since 2012, AND the largest increase in aggregate wages since 2006.

But the real story is that those record closes were achieved with a weak rise in price that was anything but an excited reaction to such strong economic data.

Furthermore, the QQQ didn’t even come close to yesterday’s high, let alone approach its recent highs. As for the IWM, I’ve stopped expecting much from it so it traded as expected – up better than the other 3 but still not significantly so.

One of the most powerful trading skills for a trader to develop is the ability to recognize a turning point in the market based on trading patterns that can be described as “good news met with bad action”. You can see a recent example of this in the IYT high on 11/28.

On 11/28 oil prices collapsed created a big gap up in IYT because lower fuel prices is good news for transportation to stocks, but the market sold the news, and IYT closed the day on the lows. That’s not good action for such good news. So it was no surprise that IYT proceeded to collapse the next day.

Yesterday’s general market action was not as bad as the IYT example, but it was not in line with the bullishness of the news. News of this magnitude should have produced the “smelling salts” effect I was wrote about here on Thursday.

I can’t say that I’m surprised about Friday, I even expressed concern that this type of apathetic reaction may happen, but I will admit the bull in me was so disappointed that I took profits in several positions I’ve held since mid October.

But Friday was not all bad. Some sectors did react quiet well. The most respectable moves came from the financials (XLF). Healthcare (XLV) and semiconductors (SMH) acted well too. Unfortunately, these have been the leading groups for months.

In conclusion, the most important news of Friday’s trading was that despite great news, the only part of the market that reacted was the strongest groups. And that’s very disappointing.

Friday made it very clear that this market needs to be treated as several different markets based on each market sector. Be very vigilant of what sector your stocks are in going forward. There is definitely an edge to be had by being in the right one!

Of course you’ll read more about the sectors below, but I’ve also made it the focus of this week’s Market Outlook video which you’ll find on our home page this weekend.

S&P 500 (SPY) Doji day but a new high close. Still consolidating.

Russell 2000 (IWM) Improved in condition but at resistance at 118.00

Dow (DIA) New high close

Nasdaq (QQQ) Inside day, more divergence from the other markets. A move lower under prior day's lows would be negative.

XLF (Financials) Liked the jobs report, closed on new highs with good leadership but very extended

KRE (Regional Banks) Gapped over the 10 DMA for an improvement in condition

SMH (Semiconductors) New high close continuing as a leader but now very extended

IYT (Transportation) Started strong but could not clear resistance at 165.75. A move below prior lows is very negative

IBB (Biotechnology) New high close and remains a leader.

XRT (Retail) Held 92 again but very disappointing performance on Friday. A break of 92 will not be good

IYR (Real Estate) Doji day on the 10 DMA held support around 76.10. Could surprise to the upside.

ITB (US Home Construction) Held yesterday’s low at 25.45 with a doji day. Bulls should watch this pull back closely

GLD (Gold Trust) Unconfirmed phase change back to bearish. But if you like to trade GLD its time to focus on it again.

GDX (Gold Miners) Gapped lower but found support at 18.65

USO (US Oil Fund) Yet another new low for the year.

OIH (Oil Services) sold off for a new 2014 low

XLE (Energy) Holding support at the 200 weekly moving average

XOP (Oil and Gas Exploration) Followed USO to the lows for yet another 2014 low close

UNG (US NatGas Fund) Strong reversal day off the lows

TAN (Guggenheim Solar Energy) Rallied into resistance from the gap lower on 12/1

TBT (Ultrashort Lehman 20+ Year Treasuries) TLTs Its muted reaction to the jobs data is even more remarkable that the the stocks (described in today's commentary). If that data couldn't push up rates, I don't know what will. There could be a big upside surprise coming here.

UUP (Dollar Bull) Gapped back to the highs for a new 2014 high close. Extended, but no markets get more extended than currencies.