Volatile Range

The stock market fell sharply Thu and Fri before and after the employment report Friday. The farm payrolls report showed 207,000 new jobs were added in July, which was 27,000 more than the market expected. Also hourly wage in July rose 0.4%, which was twice what the market expected. There is a strong inverse relationship between labor and profit, in part, because if employment increases, then the productivity falls, which generally lowers profits. In addition, some proportion of additional labor costs tend to come from the earnings there is little slack in the economy. In addition, lower productivity is inflationary, ceritus paribus (all else equal).

Employment is a lagging indicator. The unemployment rate is currently 5.0%, which is considered the natural rate of unemployment, where there is to be. An optimal balance between work and leisure A lower unemployment rate would indicate tension on the labor market, which would drive up wages. So, there is some concern about slowing earnings growth and rising inflation, for example, a wage-price spiral, even though there are signs of disinflation recently. Nevertheless, the U.S. monetary policy is still accommodative, and the Federal Reserve will be vigilant to keep inflation. Preempt

Consequently, the stock market in the short term have reached last week, top and consolidate for a month or two. July-August to September is the season weak period for the stock market. The chart below shows SPX rallied about 110 points over a period of 3 1/2 months. The two big down days Thursday and Friday were on lighter volume, which may indicate a trading range next week. SPX hit a high last week at about 1246, and 1253 is a multi-year Fibonacci resistance level that can not keep for at least several months.

SPX closed at about 1,226 half Fri. Short term resistance is at the 20 day MA, currently about 1,231 half, last week pre-Friday low at around 1235, and the 10 day MA, currently just over 1,236. If SPX rises in that area early next week, that could be a chance to buy September move. If SPX rises higher, to test, for example, the recent high-or multi-year Fibonacci level that can have a chance to buy Augustus. Puts (SPX options expire in two weeks)

SPX is currently in an assisted area, ie the congestion area in recent weeks when it held the 10 day MA, and long Price-by-Volume bar around 1225 (on the left side of the graph). Other current support levels are the open hole to 1221, the 50 day MA, currently about 1,213 half, and the longest Price-by-Volume bar around 1200. If SPX does not meet the 200 day MA, for example, hold in September, then close it. Gaps in 1174, 1143 and 1138

Next week's economic reports are: Mon: No, Tue: Productivity, Wholesale Inventories, and the FOMC announcement, Wed: Treasury Budget, Thu: Retail Sales, Unemployment Claims and Business Inventories, Fri: Export & Import Prices, Trade, and Michigan Consumer Sentiment. The FOMC is expected that the Fed Funds Rate another quarter point to 3.50% Tue. I believe the FOMC will continue to get the rest of the year fast till monetary policy neutral position (maybe 5% Fed Funds Rate) is reached. The weekly oil inventory report is Wed.

Graphics available at  Forum Index Market Overview section.

Arthur Albert Eckart is the founder and owner of Peak Trader. Arthur has worked for commercial banks, eg Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds 1999-00. Arthur Eckart has a BA and MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has to maximize a comprehensive trading methodology using economics, portfolio optimization, and technical analysis and minimizing risks developed at the same time. This methodology has resulted in excellent returns with low risk over the past three years.