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Can Yellen Rally Continue? Street Looks Ahead to Jobs Report

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March 31, 2016

(Thursday Pre-Market) With monthly U.S. jobs data a day away and the end of the quarter looming, stock prices were little changed early Thursday. Weak overseas markets and falling U.S. crude oil prices provided a slightly bearish backdrop.

It’s been a dramatic quarter, with the S&P 500 index (SPX) falling nearly 11% at one point before making a steady recovery to trade slightly higher for the year as of Wednesday’s close.  It’s fair to say that a month and a half ago, few would have expected the market to be in the situation where we could see the SPX close the quarter with a nearly 1% gain.

This revival came despite mixed data and sometimes conflicting signals from the U.S. Fed as to the course of future rate hikes, with some Fed officials saying a rate rise could come as soon as April but Fed Chair Janet Yellen saying earlier this week that the Fed would remain cautious. Markets have risen since Yellen’s speech.

There’s been a lot of data this week, but we get the mother lode early Friday with the release of the March jobs report. A Reuters survey of analysts predicts that the U.S. economy added 205,000 jobs in March, which pretty much matches the 200,000 figure released by payroll processor ADP. ADP’s report showed strong gains in construction, trade/transportation/utilities and financial activities.

As always, we’ll want to sift tomorrow’s jobs data beyond the headline numbers to see where jobs were created, hours worked and hourly wages. The wage number is definitely one to look at, because we know the Fed watches this closely.

There’s not much data on schedule today, other than Chicago PMI and natural gas inventories, so the focus could be on how traders position themselves on the last day of the quarter. The end of the quarter often signals a time for money managers to either become more fully invested in the market or to take some profits off the table. Either way, the CBOE’s volatility index (VIX) is indicating that there’s not much to get excited about. It’s down 27.5% in the last three weeks.

European stocks were recently down more than 1.1%, with banking shares falling and the energy and mining sectors weighed on by lower oil and metals prices. Oil is under pressure in part due to yesterday’s weekly U.S. supply report, which showed crude stocks rising to new record highs. The U.S. dollar remained under pressure in the aftermath of Yellen’s dovish speech earlier this week.

We’ve got two Fed speakers to keep an eye on today, with Chicago Fed President Charles Evans scheduled to speak at 9:30 a.m. ET, followed by New York Fed President William Dudley at 5 p.m. ET.

S&P 500

FIGURE 1: A NEW HIGH FOR 2016

The S&P 500 (SPX), plotted here through Wednesday on the TD Ameritrade thinkorswim® platform, posted its highest close of the year. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Hedge Funds Losing Popularity? Hedge funds reached $3 trillion in assets over the last decade, but many investors have had enough, The Wall Street Journal reported. Results for hedge funds have fallen behind a traditional mix of stocks and bonds for the last six years, and investors pulled more money out of hedge funds than they put in during the fourth quarter. New competitors that offer lower fees than traditional hedge funds are pulling investors away, the WSJ said.

Positive Quarter: All the S&P 500 Index (SPX) needs to do to record a positive quarter is to close Thursday above 2043.94, the closing price on Dec. 31. With Wednesday’s rise to 2063.95, it seems like a strong bet, barring any really bearish news today, to close the quarter with gains. If it happens, that would represent quite a turn-around from earlier this quarter, when the index fell on Feb. 11 to just above 1810. Since 1945, there were only nine other times in which the SPX declined by more than 5% in the first quarter and then recovered all (or nearly all) by the end of March, according to S&P Global Market Intelligence. In case you were wondering, in those years, for the full year, the S&P 500 then eked out an average advance of 2.2%, but only after enduring an even lower low five times.

Good Trading,
JJ
@TDAJJKinahan

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