Markets Prepare for the Start of Earnings

The jobs report on Friday caught the attention of everyone once again. The amazing drop in the rate of unemployment to 7.8%while the number of new jobs created was only 114,000 has been talked about all weekend.Ā Is it real or is it trumped up? Only those compiling theĀ numbers know the answer to that question, but we do know theĀ broad markets moved higherĀ in response, butĀ in the end it couldn’t hold the move. The S&P 500 index pushed the previous highs only to retreat and close slightly negative on the day. What does the action mean looking forward? That is the real question we face currently and one we will have to tackle in this weeks trading. Throw in start of earnings season and this promises to be an interesting week for investors.

The NASDAQ index remains detached as the technology stocks continue to lag. The semiconductors have been the primary source of weakness as the sector struggles to keep pace. The index attempted to move through resistance at the 388 level on Friday, but sold off to close down 0.3 points or barely negative on the day. The networking and software sectors were worse on Friday losing 0.8% on the day. We continue to watch the technology sector overall as it has been a drag on the major indexesĀ and keeping them fromĀ breaking to new highs. We are still holding our short position in the sector, but we have tightened our exit points heading into earnings. I don’t see the overall market making great stridesĀ  on the upside without the participation of the tech stocks.

The leadership over th last week has come from the financials and looking forward they will be needed to carry the indexes higher. The overall sector had a strong week gaining more than three percent. The banks (KBE) were the leaders on the upside as Bank of American, Wells Fargo and Citigroup led the charge. Insurance, regional banks and broker-dealers were up as well. This remains one of the sectors to watch this week in trading.

Retail had a strong week as well responding to positive same store sales data. The uptrend remains in play and the leadership is shifting back towards the discount retailers. There is plenty of speculation on why, not the least of which is the price of gasoline hitting the four dollar per gallon mark yet again. I see pressure on the spending in this sector and remain suspect of the upside in the sector overall. You have to take the time to dig into the sector to find the leadership and own the stocks that will benefit from the current economic environment. DollarĀ  Store (FDO) as an example broke higher from the recent consolidation near the recent lows. Wal-Mart is at the top end of the current consolidation range and set to move higher. Make the effort to find the winners in the sector versus ownership of the sector overall.

The commodities continue to be a exercise in volatility. The price of crude has seen big swings the last week of trading closing below the $90 level again on Friday, and down more than one percent over the weekend. On the opposite side gasoline has been equally volatile, but closed near the highs on Friday. Some rumors about a shortage of gasoline in California over the weekend won’t help the price heading into the week of trading. Watch the commodities they are almost as confused as most investors over the rate of unemployment dropping to 7.8%.

We have to watch how investors respond to the start of earnings. If the sentiment starts off negative look for aĀ test of theĀ September 26th lows on the major indexes. Don’t assume anything, protect against the downside risk and remain focused on the objective.