By Jim Donnelly
April’s better-than-expected employment numbers released Friday sparked a broad-based rally that lifted the S&P 500 Index above key resistance at 1,600 to a new all-time high and witnessed the Dow Jones Industrial Average breaking above 15,000 before settling just below it at the close. Perhaps more important was Friday’s surge in the NASDAQ Composite Index (IXIC) which broke above key trend line resistance that dates back to 2001 at 3,330. Granted, Friday’s close was well below its all-time high mark set at 5,132.52 in March 2000. Nevertheless, Friday’s NASDAQ “breakout” was a big plus for the overall economy since tech stocks in general and the semiconductor sector in particular made solid gains. This combination is usually associated with economic growth since it reflects a rotation out of defensive investments like utilities, bonds and cash and into the technology sector (as well as into the energy and materials sectors) and is crucial to the view that the economy may genuinely be improving.
Although there is a lot of “wood to chop” before more vigorous growth can be achieved, a shift to technology stocks is a reflection of future capital expenditure spending. If those expenditures are realized in future months, the economy should expand and put more people back to work.
On the other side of the ledger, Friday’s employment numbers, while better-than-expected, had a few blemishes. While the unemployment rate for those who did not have a high school diploma went down, the unemployment rates for those with a high school diploma, for those who had some college or associate degree, or for those who did have a college diploma all went up. In addition, the U-6 measure of unemployment edged higher to 13.9% after falling steadily since last July.
That being said, despite overbought conditions on long-term charts and the fact that margin debt is near an all-time high, equity prices advanced sharply. From a technical point-of-view, if the IXIC can remain above the 3,330 level on a weekly basis, a move toward the next key level of resistance currently sitting at 3,625 may unfold.
A solid reversal below 3,330, on the other hand, would damage this optimistic outlook.