For the bulls, the S&P 500 closed just below 2,000 on Friday after the jobs report came in well above expectations, the prior two months’ reports were revised higher, and the unemployment rate remained at 4.9%. The positive economic data helped spur a rally in financials because it increases the likelihood of interest rate hikes later in the year. In addition, crude oil closed above $35 and copper rose to its highest level in four months, which spurred a rally in the commodity sector.
For the bears, last Monday it looked like there was the potential for another re-test of the market run. However, once again the bulls took over, finishing higher Tuesday through Friday. However, the bears would point out that the recent rally has been on some of the lowest volumes of 2016. Also, manufacturing data continues to signal the potential of a recession, and pending home sales missed expectations.
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 16.86, lower by 15% for the week. The drop below 20 was to be expected when the S&P finally broke through 1,950 to the upside. However, bullish VIX positions, which would be bearish for the overall market, picked up steam into the end of the week and volumes on the VIX surged, indicating traders are adding hedges/bearish bets.
Events for the Week to Come
While last week was full of economic data, this week will be extremely light. However, there is the potential for a large market-moving event on Thursday as the European Central Bank is again expected to announce easing measures. It is expected that the ECB will ease, but the market will be closely watching to see if the committee will use its “bazooka” (full arsenal?) including deposit rate cuts, an increase in monthly asset purchases, and an extension of these measures.
What Traders are Saying
I may have sounded like a broken record regarding the market’s recent extreme sector rotation, but last week was perhaps the most vicious I’ve seen in many years. In the blink of an eye, the commodity-related stocks, which had been crushed for the past year, ripped higher. I began highlighting this action in a market update and in my daily order flow emails beginning on Wednesday. By the end of the week, stocks such as U.S. Steel (X) and Joy Global (JOY) closed the week higher by 56% and 41% respectively.
While this action was impressive early in the week, it seemed to apex on Friday when Seadrill (SDRL) closed the day higher by 121%, and 215% for the week. The bears would point out that this type of craziness and short squeezes can be a bad sign for the market because the “junk” lead for most of the last week.
I have no idea if this is the beginning or end of a squeeze … no one does. However, if you are bullish or bearish on these stocks, many of which added over 100% the past week, I recommend using calls or puts to make your “bets.” For example, outright shorting these stocks could be extremely painful if this is just the beginning of a rally versus buying puts in which losses are limited to the premium paid. (This morning’s daily order flow email is full of big trades made against stocks that have made big runs.)
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