State of the Stock Market Analysis for the Week Ending May 10th, 2015 (Stocks Rise Sharply After Employment Report 05-10-2015)Gorilla Trades stock picking

Bulls were cautiously optimistic heading into Friday, and what we needed was a solid jobs number. That was exactly what we saw Friday morning, as investors gave a “thumbs up” to the government employment report and stocks headed sharply higher. Economists were looking for 228,000 new jobs for April, and while the 223,000 figure was not a blockbuster number, it was good enough to rev up a stock market that was having a tough week. Friday’s rally alone pushed the Dow up 1.5%, the Nasdaq up 1.2% and the S&P 500 up 1.3%, which helped the major indices close out the week with the Dow up 0.9%, the Nasdaq flat and the S&P 500 up 0.4%.

It was not that bad of a week given Janet Yellen’s comments that the stock market was overvalued. Market watchers are still scratching their heads as to why the Chairman of the Federal Reserve said that equity prices were quite high, especially when she said it just as the stock market was acting a bit vulnerable. Had Yellen said such a thing during a runaway bull market, it would have made more sense. However, her comments came mid-week against the backdrop of mixed earnings reports and mixed economic news.

Many Fed watchers were surprised that the Head of the Fed decided to chime in on equity market prices precisely when she did. There had to be a good reason, but it still left many investors wondering why. After all, we had still been digesting that awful-looking, first-quarter GDP number of 0.2% from last week, and we were still factoring in the recent spike in the trade deficit, which all but guarantees that first quarter GDP could be revised downward into negative territory. Did Yellen know that a solid jobs number was on the way or did she just want to have the Fed on record saying that the stock market was looking rather pricey?

The jobs number was the trigger of Friday’s rally, but when you think about it, the jobs number was not all that great. Yes, it was a big improvement on March’s number, but it was hardly a sign of a booming economy. It was a good enough number, however, that it opened the door once again to a Fed rate hike as early as June. A June hike does not seem likely, but then again, we all know that the Fed wants to get rates back up toward “normal” levels as quickly as possible. We also know that the stock market does not perform very well during periods of rising interest rates.

The S&P 500 had dipped back down toward its 50-day moving average of 2,089, and as it has several times in the past few months, it successfully bounced back on Friday from that important level. With its 2,116 close on Friday, it is once again within striking distance of its all-time high of 2,125. That is quite amazing, especially after hearing Janet Yellen say this week that the stock market was looking a bit extended and pricey. There were few complaints among the bulls, though, and instead of worrying about Janet Yellen, they are looking forward to making a run toward a new all-time high as soon as possible.

So could a new all-time high be in the cards for next week? We shall see, but the optimism that came back into the stock market on Friday suggests that we could see some upside flow through. Earnings season overall was good, but not all that great, and economic news is still mixed, but generally good. The 223,000 new jobs created was exactly what the stock market needed to see, and that really helped alleviate the fears we had following the recent trailing off in first-quarter GDP. Maybe Janet Yellen’s comments were meant to cool off a stock market before it came close to getting too hot.

Having the S&P 500 so close to an all-time high, despite Janet Yellen’s comments, is a feat in and of itself. Fed Chairmen’s comments are very important and always remembered, so in some ways, Yellen has provided the Fed with covering fire for when it actually does start raising interest rates. She said that stocks are expensive and extended, so if they do fall sharply when the Fed eventually raises rates, then Yellen can say that “I told you so.” She can say that she warned of extended equity prices in early May of 2015, so maybe that explains the timing of her comments this week.

If the Fed raises rates in September or December of this year, Janet can say that she had already warned us of high prices, so maybe she was just getting the bull market ready for the inevitable. Either way, investors shrugged off her comments and stocks headed higher this week. And, not many bulls are complaining. Rate hikes will not play too well if and when they do come, but for the time being, investors do not seem all that concerned. It was a good week despite a lot of headwinds, and with earnings season behind us, the renewed optimism seems likely to have some staying power.

Global shocks were subdued this week, although Greece, Russia, China and the Middle East are always ready, willing and able to throw a “wild card” into the mix. It was fairly calm on the world stage this week, so that seemed to play into the positive atmosphere we saw as we closed out this first full week of May. Next week should give us a fairly good take on what sort of summer we have ahead of us in the stock market, so stay tuned as we move deeper into May and on toward summer.

That said, the Gorilla wishes each and all a relaxing May weekend. A big reminder to all is that tomorrow is Mother’s Day, so do not forget to call or show appreciation to all of the moms in your life. Again, have a great weekend, and we will be back in action on Monday!

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