Equity Index Futures Drift Lower on Disappointing Jobs Report

The Employment Situation Report was released Friday. GameStop and Acuity Brands were moving in premarket trading. Energy and financial stocks outperform other sectors on rising oil prices and Treasury yields. The market discounts everything and continues to move as investors adjust. Opposing short-term trends can lead to greater market volatility.

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5 min read
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Key Takeaways

  • The Employment Situation Report Revealed Few Than Expected Jobs Added in December

  • Energy and Financials Stocks Outperform on Rising Oil Prices and Yields 

  • Opposing Movements Among Major Indices Could Lead to Market Volatility 

JJ Kinahan, Chief Market Strategist, TD Ameritrade

(Friday Market Open) The Employment Situation report was released on Friday and was weaker than expected; the economy added about half the jobs that were forecasted. The Omicron variant and the recent trend of self-employment as part of the Great Resignation could be to blame for the smaller number. However, the unemployment rate fell to 3.9% from 4.1% which was aided in part by an increase in the participation rate. Equity index futures drifted a little lower on the news.  

A few stocks that were moving in premarket action included GameStop (GME), which was trading 14.48% higher on news that the company is launching a division to develop a marketplace for NFTs or nonfungible tokens. Additionally, the company plans to establish partnerships for cryptocurrencies. The plans are part of an overall vision that’s meant to turn GameStop around.

Acuity Brands (AYI) rose more than 4% in premarket trading after reporting that the company beat earnings and revenue estimates. The electronics company saw strength in its lighting and lighting controls sales despite supply chain challenges.

Of course, not all stocks are rising; Starbucks (SBUX) fell 2% in premarket trading after being downgraded by RBC Capital and Oppenheimer. The analysts cited near-term growth concerns.

Bitcoin continues its slide Friday morning, dropping another 3.21%. The cryptocurrency is down more than 11% in the last five days and nearly 38% from its November 2021 high.  

On Thursday, the major indices closed lower with the S&P 500 (SPX) testing its 50-day moving average. Growth stocks fell in the morning session because of another rise in interest rates, but bargain shoppers appeared to come in later in the day and pushed many growth stocks off their lows. Despite the major indices being down, NYSE advancers actually outpaced decliners about 1.25 to 1. Additionally, the Cboe Market Volatility Index (VIX) fell 0.61%. These could be important undercurrents to keep an eye on.

Packaged food company Lamb Weston (LW) led the S&P 500, rising 9.32% after announcing better-than-expected earnings and revenue. It was followed by California-based bank SVB Financial Group (SIVB), which rose 6.76%, and the security software company NortonLifeLock (NLOK), which rose 4.66%.

Once again, the energy sector led all other sectors and was helped by a 2.31% rally in crude oil prices (/CL), a 1.41% increase in heating oil prices (/HO), and a 0.66% rise in RBOB gasoline prices (/RB). The Energy Select Sector Index ($IXE) rose 2.24%, creating a new 52-week high. Energy could continue to lead on Friday as oil prices continue to rise in premarket trading,  climbing over $80 on its 1% rally on Friday. However, the energy index is now testing some 2019 highs that could act as resistance.

Financial stocks were the second most popular sector, resulting in the Financials Select Sector Index ($IXM) rallying 1.55% and closing at a new 52-week high. Financial stocks were helped by a 1.64% rise in the 10-year Treasury yield (TNX). The 10-year yield has rallied more than 14% in the last four days and almost 30% from its December low. However, the 10-year yield is also testing its historical highs from March 2021, which could slow the rally.

Market Discounting

With oil prices and the 10-year yield reaching historical highs, the rallies in energy and financial stocks may pause and allow investors a chance to digest the effects of higher oil prices and higher interest rates. Charles Dow, who, with Edward Jones and Charles Bergstresser, founded Dow Jones & Company, Inc. in 1896, created the Dow Jones Industrial Average ($DJI) and developed a theory that the “market discounts everything”. What this means is that the collective wisdom and knowledge of all participants is reflected in the price of the index or stock. This is similar to efficient market hypothesis that states share prices reflect all known information.

While liquid markets tend to be efficient, they can take time to discount new information because many money managers have a lot of money, and it takes time to move capital. On Wednesday, we learned that the Fed was much more hawkish than many investors had originally thought. We saw many stocks fall on the news as the initial reaction was bearish. However, as time goes on, we’ll likely see other investors “vote” by either buying up fallen stocks or focusing on investments that may benefit from the new information.

The “votes” from buyers and sellers create an important process called price discovery. Price discovery often comes with increased volatility because there’s a lot of participants with a lot of money and a lot of strong opinions. Investors who are willing to watch these changes may find opportunities arising.  

CHART OF THE DAY: WHOLE PICTURE. The major stock indices have recently pulled back below levels of support. The S&P 500 (SPX—upper left) fell below its previous highs. The Dow Jones Industrial Average ($DJI—upper right) has also broken support and is trading just below its previous highs. The Nasdaq Composite (COMP:GIDS—lower left) is range-bound and near support. The Russell 2000 (RUT—lower right) is at the lower end of its year-long range.  Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.  

Resistors in Parallel: Markets tend to move more smoothly when the indices are generally moving in the same direction. However, the S&P 500 (SPX) and the Dow Jones Industrial Average ($DJI) have just recently broken support, which my technical analysis friends tell me could be a sign that the bulls are losing. However, the Nasdaq Composite (COMP:GIDS) is testing support, which could be bullish if the price bounces. The Russell 2000 (RUT) is in between support and resistance and has been for about year, so bulls and bears haven’t really made a commitment to a direction.

What we see here is the the S&P 500 and the Dow will likely have bearish pressure, while the Nasdaq could have bullish pressure. This will likely result in market volatility. Additionally, because the Nasdaq has already shown greater weakness, it may actually break support if the S&P 500 and the Dow do swing lower.

Alternating Currents: While there’s almost always a company or two announcing earnings from week to week, the unofficial earnings season starts next week. Earnings can help provide the needed information investors are seeking when determining what to buy and what to sell. It’s a deluge of information that the markets have to discount.

Earnings season starts with major financial companies and banks. This could be very interesting because we’ve already seen financial stocks move quite a bit on rising yields. 

Good Trading,

JJ

@TDAJJKinahan

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Key Takeaways

  • The Employment Situation Report Revealed Few Than Expected Jobs Added in December

  • Energy and Financials Stocks Outperform on Rising Oil Prices and Yields 

  • Opposing Movements Among Major Indices Could Lead to Market Volatility 

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