Volatile Range

The stock market fell sharply Thu and Fri before and after the employment reports Fri morning. The Nonfarm Payrolls report showed 207,000 net jobs were added in July, which were 27,000 more than the market expected. Also, Hourly Earnings in July rose 0.4%, which was twice what the market expected. There's a strong inverse relationship between employment and profits, in part, because when employment increases, then productivity falls, which generally lowers profit growth. Moreover, some proportion of additional labor costs tend to come from profit growth when there is little slack in the economy. Furthermore, lower productivity is inflationary, ceritus paribus (all else equal).

Employment is a lagging indicator. The Unemployment Rate is currently 5.0%, which is considered to be the natural rate of unemployment, where there is an optimal balance of labor and leisure. A lower unemployment rate would indicate strain in the labor market, which would drive up wages. So, there is some concern for slowing profit growth and rising inflation, e.g. a wage-price spiral, although there have been signs of disinflation recently. Nonetheless, U.S. monetary policy is still accommodative, and the Federal Reserve will need to remain vigilant to preempt inflation.

Consequently, the stock market may have reached a short-term top last week, and may consolidate for a month or two. July-August-September is the seasonally weak period for the stock market. The chart below shows SPX rallied about 110 points over a 3 1/2 month period. The two big down days Thu and Fri were on lighter volume, which may indicate a trading range next week. SPX hit a high at about 1,246 last week, and 1,253 is a multi-year Fibonacci resistance level that may not hold for at least several months.

SPX closed at about 1,226 1/2 Fri. Short-term resistance is at the 20 day MA, currently about 1,231 1/2, last week's pre-Friday low at about 1,235, and the 10 day MA, currently just over 1,236. If SPX rises into that area early next week, that may be an opportunity to buy Sep puts. If SPX rises higher, e.g. to test the recent high or multi-year Fibonacci level, that may be an opportunity to buy Aug puts (SPX options expire in two weeks).

SPX is currently in a support zone, i.e. the congestion area over the past few weeks when it held the 10 day MA, and the long Price-by-Volume bar at around 1,225 (on left side of chart). Other short-term support levels are the open gap at 1,221, the 50 day MA, currently about 1,213 1/2, and the longest Price-by-Volume bar at around 1,200. If SPX fails to hold the 200 day MA, e.g. in Sep, then it may close the gaps at 1,174, 1,143, and 1,138.

Next week economic reports are: Mon: None, Tue: Productivity, Wholesale Inventories, and the FOMC announcement, Wed: Treasury Budget, Thu: Retail Sales, Unemployment Claims, and Business Inventories, Fri: Export & Import Prices, Trade Balance, and Michigan Consumer Sentiment. The FOMC is expected to raise the Fed Funds Rate another quarter point to 3.50% Tue. I believe the FOMC will continue to tighten the rest of this year, until monetary policy reaches a neutral stance (perhaps 5% Fed Funds Rate). The weekly oil inventory report is Wed.

Chart available at PeakTrader.com Forum Index Market Overview section.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time. This methodology has resulted in excellent returns with low risk over the past three years.

---

Remembering TEOTWAWKI and Learning from It

Its only been about 5 years since we had major... Read More

Are You An Investment Dummy Like Me?

I am good at a few things. I can certainly... Read More

How to Invest Overseas - Intelligently!

In recent months, many advisors have talked a lot about... Read More

Stock Market Retirement Investment Plan

For a successful retirement investment plan to work in the... Read More

Hedge Fund 101 - Make Money with Hedge Funds

Investors are always looking for the best investments that will... Read More

Secret Stock Options Trading Strategies the Experts Don`t Want You to Know

To understand stock options, we need to look at Webster’s... Read More

Retirement Plan Considerations Cheat Sheet for Small Business

RETIREMENT PLAN CONSIDERATIONS are something every small business person needs... Read More

Creating a Financial Future - Putting Your Plan Into Action Part 1

This column has previously discussed "picturing the future that we... Read More

Ask The SEC

Who is the SEC and why should I ask them... Read More

Dont Catch a Falling Knife

One of the most common mistakes made by inexperienced investors... Read More

The Difference Between Investing and Trading

Investing and Trading are not the same thing. The returns... Read More

Is a SEP Plan Right For Your Business

A SEP is a special type of IRA. Under a... Read More

When Its Too Late to Save for Retirement

You are 55 years old (or somewhere around there) and... Read More

Chile Leads the Latin Pack

Everyone's talking about China. Don't miss the opportunities in the... Read More

Chinas Great Missed Opportunity

While a U.S. Representative to the Asian Development Bank Executive... Read More

Stocks, Oil, and Bonds

A barrel of oil bounced to over $60 Thu, which... Read More

Retire Dollar Smart

Jim Miller is a registered investment advisor. This means that... Read More

Finding the Perfect Company

The perfect company - it's the holy grail of the... Read More

Delist My Corporation Please

It use to be said that once a company was... Read More

A Gadfly On A Dinosaurs Butt, Or The Hood-winking Of The American Investor

Have you ever noticed how some words in the English... Read More

Love The Thrill of Risk? Invest in an Annuity!

With the stock market in steep decline, people are looking... Read More

5 Ways To Protect Your Bond Portfolio From Rising Interest Rates

The Federal Reserve recently raised its target federal funds rate... Read More

Out-Of-State Investors Check List of Questions

The following lists of questions are suggested questions to ask... Read More

Bearish or Bullish?

If you are interested in stock investing and the stock... Read More

Going Offshore For Asset Protection

There are a number of key reasons why individuals and... Read More