And Away They Go

The markets roared at the opening of trading for 2012. The primary catalyst for the Tuesday rally was a slew of better-than-expected PMI readings from around the world. Better than expected numbers were released in the U.S., China, India, Germany, and the UK. Market internals on Tuesday showed investors had an appetite for aggressive names to kick off the year. Several economically sensitive areas of the market advanced (materials, energy, industrials, financials) while last year’s darlings, utilities, was the weakest sector. More than 10% of the S&P 500 set fresh 52 week highs with just one name hitting a 52 week low.

The markets sputtered at the open Wednesday. The big winning space of Tuesday, financials, saw some early profit taking. The consumer space was the outperformer, with retail especially strong. News from Europe did not cause much action in the markets Wednesday. There were rumors of Spain needing an IMF bailout, but the government denied that. Commodities were mixed on the day. Growth commodities muddled through and gold caught a safe haven bid for the first time in a while. 

The major indices extended their gains Thursday and the S&P 500 is up 1.8% through the first three days of trading. Investors have focused on a series of upbeat economic numbers. The ADP labor report was better than expected. U. S. Private payrolls increased by 325,000, which is far more than the increase that of 180,000 that had been broadly expected by economists. 

The euro was weak on Thursday but it did not hurt U.S. equities. Movements in the Euro were seen as expressions of investor sentiment towards the region’s debt crises over the summer. When the Euro went up it was seen as a reduction in perceived risk in the region and domestic markets advanced. But, over the last couple of months the two have started to be less correlated. Perceptions are starting to shift, with a weakening euro now responding to massive ECB accommodations/balance sheet expansion and less to sovereign fears. 

Stocks finished slightly lower on Friday. The December payrolls report was better than expected and lifted stocks in the pre-market Friday. The headline unemployment rate of 8.5% was down slightly. Nonfarm payrolls climbed by 200,000, which exceeds the increase of 150,000 that had been expected. Private payrolls increased by 212,000, better than the 170,000 consensus expectation.

The market could not hold an early rally and closed down slightly. The strong gain on Tuesday helped the market post a gain of 1.6% for the week. The “First Five Days” pattern for the market concludes today. Research from the "Stock Trader’s Almanac" tells us it is important to focus on how the first five days of trading go. Especially if that period is a strong one. Of the 38 most recent years that the first five days resulted in a gain, the year itself, was up 86.8% of the time. The pattern is not nearly as good a predictor when the first five days are down. When the first five trading days are down the pattern has a 50/50 predictive value.

The technical picture of the market is mixed but improving. There has been an improvement in the number of stocks in the S&P 500 that are in basing or advancing positions over the past few weeks. 59% of the stock in the S&P 500 or in good shape technically. If the reading gets over 60% it increases the chances of an intermediate term advance. A reading of better than 70% signals a long term move higher. 

Here are the technical levels to watch carefully. I am going to add the Russell 2000 this week because small cap stocks will be critical in the near term. If this recent market rally is going to continue small cap stocks, which have lagged large caps, will have to improve significantly. The rally will gain strength if the S&P 500, Dow, NASDAQ and Russell 2000 can close above 1294/12,400/2755/770 respectively. Here are some levels for downside support. 1270 and 12,300 for the S&P 500 and Dow are the first levels of support. Signs that the market is weakening and a selloff will get underway will be a close below these levels for the major indices 1248/12,100/2600/734.