WEAK JOBS REPORT SENDS STOCK FUTURES AND BOND YIELDS LOWER -- DOLLAR WEAKENS AGAINST THE EURO -- DOW INDUSTRIALS MAY CHALLENGE MARCH LOW AS DOW TRANSPORTS SLIP BENEATH 200-DAY LINE -- HOMEBUILDER ETF HITS EIGHT-YEAR HIGH
MARCH JOBS REPORT IS THE WEAKEST SINCE DECEMBER 2013... The March jobs report released this morning showed only 126,000 new jobs created, which was nearly half what most economists were expecting (245,000). In addition, jobs created for January and February were revised downward. The unemployment rate remained unchanged at 5.5%. The extremely weak report had a predictable impact on stock futures which fell sharply. [U.S. stocks are closed today for Good Friday, but stock index futures were open for 45 minutes after the 8:30 jobs release. Bonds traded until noon]. Dow futures fell -165 points, S&P 500 futures - 19.75 points, and Nasdaq futures - 44 points. Treasuries rallied as bond yields fell. The 10-Year Treasury yield fell 7 basis points. Fed fund futures lost 4 basis points as odds for a June Fed hike diminished. The dollar weakened against the Euro. All of which suggests that U.S. stocks may come under selling pressure when they open on Monday. Judging from the past week's volume pattern, investors have already turned more defensive. Chart 1 shows a daily CandleVolume chart (developed by Richard Arms) for the Dow Industrials (through Thursday). What distinguishes the CandleVolume bars is that their "width" is determined by the day's trading volume. Heavier volume produces a fatter candle. The pattern over the last week shows fatter candles on down days (red candles) and thinner candles on up days (white candles). [That negative pattern is confirmed by the volume bars below chart]. That suggests that traders have been selling more aggressively than they've been buying. A lower opening on Monday could push the Dow into a test of its March lows and, eventually, its 200-day moving average. The Dow Transports are already there.
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Chart 1
DOW TRANSPORTS SLIP BELOW 200-DAY AVERAGE... Last Saturday's message showed the Dow Jones Transportation Average testing chart support along its 2015 lows and 200-day moving average. The daily bars in Chart 2 show the TRAN ending the week below its 200-day line. It's also pressuring first quarter lows. That's a very important test for the transports and the rest of the market, including the Dow Industrials. Transportation stocks are viewed as a barometer of economic strength or weakness because they move the goods that the industrials produce. A healthy market has industrials and transports rising together. A breakdown in either one isn't usually good for the other. Rails and Delivery Services have been the weakest transportation groups. Truckers, however, were this week's weakest group. Chart 3 shows the DJ Trucking Index falling below its 50-day average to the lowest level in two months. It's also bearing down on its 200-day line. Chart 4 shows the DJ Airlines Index also in danger of rolling over to the downside.
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Chart 2
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Chart 3
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Chart 4
HOMEBUILDERS RESUME UPTREND... Homebuilders usually benefit from lower bond yields. That may partially explain this week's strong performance. Chart 5 shows the Dow Jones Home Construction iShares (ITB) closing at a new 52-week high on Thursday, which actually puts it at the highest level since 2007. Its relative strength line (brown line above chart) has been rising since last October and is also at a new high. Notice that the homebuilder relative strength ratio has tended to rise whenever the 10-Year Treasury yield (green line) falls. Lower bond yields translate into lower mortgage rates which is good for homebuyers. Individual leaders hitting new yearly highs were DR Horton (DHI), Lennar (LEN), and Toll Brothers (TOL).
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Chart 5
TOLL BROTHERS NEARS BREAKOUT... Lennar is a clear leader in the homebuilder group. The monthly bars in Chart 6 show Lennar (LEN) trading above its 2007 high and at the highest level in nine years. Chart 7 shows DR Horton (DHI) having just broken through its 2013 high, and also trading at the highest level in nine years. Toll Brothers may be next. Chart 8 shows Toll Brothers (TOL) trading just shy of its 2013 intra-day high at 39.95. It has already exceeded its 2007 high. A decisive close above 40 would put TOL at the highest level in ten years.
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Chart 6
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Chart 7
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Chart 8
CHINA LEADS EMERGING MARKET RALLY... Emerging markets usually do better when Treasury yields are dropping along with the dollar. Which may help explain why emerging markets were among the world's strongest stocks this week. The red daily bars in Chart 9 show Emerging Markets iShares (EEM) ending the week at a new four-month high. It's also trying to clear its 200-day average. The rising green line is the WisdomTree Emerging Markets Currency Fund (CEW). It started rising with the EEM in mid-March. That suggests that a weaker U.S. dollar is part of the reason for money flows into emerging assets. [Higher U.S. rates, and a strong dollar, siphon money from higher-yielding emerging markets]. Among the biggest EEM gainers this week were Brazil and Russia. The real star, however, is China.
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Chart 9
CHINA ISHARES ACHIEVE MAJOR BULLISH BREAKOUT ... Chinese stocks have been the strongest in the world over the last year. The Shanghai Stock Index has gained 88% since last April and is now trading at the highest level in seven years. Money flows into Shanghai started last spring when the Shanghai-Hong Kong Stock Connect was first announced (and launched in November). That opened up trading of mainland Chinese stocks (A shares) to foreigners. The Hong Kong Hang Seng Index lagged behind Shanghai over the last year (gaining 14%), but it still close to a new seven-year high. The most liquid of the Chinese ETFs achieved a bullish breakout of its own this week. Chart 10 shows FTSE China iShares (FXI) closing above its 2010 high to reach the highest level since 2008. That's a major bullish breakout. Some newer Chinese ETFs have been started over the last year that focus on mainland stocks. The Deutsche X-Trackers Harvest 300 (ASHR) offers exposure to mainland A-shares traded in Shanghai and Shenzhen. I can't vouch for its liquidity, but the ASHR has gained 94% since last April. Chinese authorities have lowered interest rates to boost its economy, and have hinted at more monetary easing to come. That's also driving money into Chinese stocks.
