Focus Letter

Market Rallies Following Thursday's Economic Data

Good morning! Thursday saw a flurry of economic reports released, and while the news didn't create any strong immediate reaction other than a brief pop higher in the premarket coming out of the employment data, the overall market took it in stride and saw one of the best uptrend days of the year thus far. Advancers outpaced decliners on the New York Stock Exchange 25 to 7, and by 22 to 7 on the Nasdaq, leading to a 91.97 point gain ($INDU: +0.8%) by the Dow Jones Industrial Average, a 15.62 point gain ($SPX: +1.2%) in the S&P 500, and a 40.98 point gain ($COMPQ: +1.9%) in the Nasdaq Composite.

The Labor Department reported that first quarter productivity in the U.S. nonfarm business sector rose at an annual rate of 3.7%, but that a smaller than expected rise in unit labor costs of 1.6% eased concerns that the Fed was getting too far ahead of itself with the continual, steady rate hikes. Revisions in the fourth quarter data also showed that the inflationary climate more benign than was previously believed to be the case. Instead of risking 3% as reported, unit labor costs in the fourth quarter fell 0.6%, making them 0.3% higher in the past year as opposed to 1.4% reported last month. Meanwhile, real hourly compensation (adjusted for inflation) rose 3.2% in the first quarter.

The Labor Department also stated that initial jobless claims rose to its highest four-week average since October to 336,000, an increase of 7,000 for the week ending May 27th. Most eyes are on Friday's employment data, however, particularly May payrolls.

In other news, construction spending for April fell 0.1%, due to a slowdown in home construction. Separate reports also showed a decline in pending home sales for the third straight month as the housing market overall continues to lose some of its steam. Given that we just listed our own home for sale, let's hope this hurricane season doesn't scare off more buyers from southern Florida! (Hey! No laughing please!)

Factory activity also slowed in May. The Institute for Supply Management reported that the ISM index fell to 54.4% in May, off the 57.3% level for April. This was a little bit more than the anticipated move to 55.8%. By coming in at over the 50% level, this reading is still indicating expansion, but it's the lowest reading since last August.

Unlike a lot of the upside moves in the market in recent months, Thursday's session didn't just make a choppy, yet steady push to highs. Instead, it took to it in steps. This made it easier for those who missed the initial morning move out of the open to get on board with some decent intraday continuation patterns. This is something most of the recent intraday upswings have seriously lacked, making it a more difficult market for pattern-based daytraders.

The indices put in several strong bull flags on the smaller 2-5 minute time frames throughout the morning, continuing the late day rally that began into Wednesday's close. The pace slowed into mid-day on Thursday when "the mid-day doldrums" set in. Volume declined over noon as the market fell into a nice trading range along intraday highs. The pullbacks within the range were slow and steady, in other words, just what one wants to see for a late day continuation. Risk increases if the reaction off the highs of the range are sharper than the upside within a range if one is hoping for an upside breakout from the consolidation. In such a case, even a new high can more often serve as merely a trap before turning over and selling off.

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After consolidating into the 15 minute 20 sma support, the indices again broke higher with the 14:00 ET reversal period. This is a very common time of the day for breakouts after the market falls into a range over noon. The initial continuation was on the slow side, but a smaller base at highs from 14:30-15:15 into the 5 minute 20 sma resulted in a stronger rally into the close. The market ended the day within a few ticks of the session's highs. The tech sector saw the strongest gains on the day with networkers ($NWX) alone soaring 4.1%.

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There's still some room for a strong open going into Friday morning before the market hits equal move resistance on the 15 minute charts when comparing Thursday's late day breakout to the move going into the start of the session. Looking at the technical aspect alone, I would expect a continuation into the first hour or two of the day, or else a decent upside gap with continuation for the first 15-45 minutes, and then a correction from those highs ahead of the afternoon. The wild card, of course, will be the jobs data due out ahead of the open. The rally Thursday does, however, put the market back on track to attempt the triangle range we were looking at on the daily and weekly charts as we headed into this week.