Market Analysis for Feb 6th, 2004

The indices whipped around at the beginning of the day right after the jobs data came out and finally took off. The E-mini March S&P went from 1125 straight up to 1138-39, and we've been consolidating at the very high level, 1137-38, for the last three hours. So it's a very powerful day and there aren't any sellers, and one thing we've come to appreciate about this market in the past is that once a decline is over the bears get out of the way in a hurry and the bulls just rip the market to the upside.

The question is: Where can we put this upmove in context of where we've come from in the last three weeks? In the E-mini March S&P we've come from 1155 on the 26th of January to a low of 1120.75 on January 29. Since then we've rallied to 1142, we've declined to 1122, and today we find ourselves back at 1139, which is approaching that prior rally peak of 1142.

So if we look at it as one continuous move, it looks like you've gone from a downmove to a sideways move, and the sideways move is a range that has bookends at 1142 and 1120. We're admittedly at the top of the range, and I think that maybe later today, if not Monday morning, the move will continue to go up from 1138 into the 1142 area to probe that prior high that was established on February 2.

The problem is what happens at 1142. A lot is riding on the pattern's development, because on one hand my work tells me that the move from 1155 to 1120 is the first leg of a correction that is incomplete, and that after this recovery rally, be it a large one, there'll be another decline out there. This would take the E-mini March S&P, for instance, from 1142 to 1113, which was the early January low, or even moreso, down to the 1095 level.

That's the scenario I'm working off of unless 1142 is taken out and the market sustains up there and continues higher, in which case we're going for a retest of the highs.

How do we put it all in context not of the pattern but of the fundamentals? Well, what I wrote today on the site after the numbers came out is that it was interesting that the bond market ripped to the upside, the stock market ripped to the upside, gold ripped to the upside, and the euro ripped to the upside. All these markets can't go up for very long in the same direction. Usually, you get bonds and stocks diverging. At least we have for quite a while, because when money seems to be going into stocks, it comes out of bonds.

In this particular case, the bond market seems to think the jobless numbers were a real disappointment even though they showed triple-digit gains, because they should have been twice as much. On the other hand, the stock market is saying that maybe finally the jobs data is kicking in and next month we will get to 200,000 or more. So both of those markets have reason for optimism.

The euro, on the other hand, is really a function of that market moving up and foreigners voting no when it comes to how strong they think the U.S. expansion is at the moment, and that they think it will continue to be a jobless expansion/recovery.

So there are a lot of crosscurrents in there, and my sense is we should keep an eye on what the bond traders are doing, really, because that will give us some clues as to whether or not the stock market will continue higher.

My sense is the bond market going higher will put the kibosh on stocks, and that money will start to come out of stocks and go into bonds for fear that not only will the Fed not really need to raise to rates within the next six months, they may even need to add more liquidity to the system because the recovery will show it's been a monetary recovery as opposed to a business expansion recovery.

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