S&P 500

S&P 500 Bounced Off Key Technical Supports After a Big Negative Surprise from the April Nonfarm Payrolls Report

Witawat (Ed) Wijaranakula, Ph.D.
Fri May 6, 2016

The S&P 500 closed at 2,057.14 on Friday, down 0.4% for the week, but up 0.65% year-to-date. The best performing S&P 500 sectors for the week were Consumer staples and Utilities, which were up 1.74% and 0.79%, respectively. Money rotated into safe havens and non-cyclical stocks, which tend to outperform during a recession, as weak U.S. economic data continued to pile up. The worst performing sectors for the week were Energy and Materials, which were down 2.95% and 2.01%, respectively. 

A big negative surprise hit the markets on Friday after the release of the nonfarm payrolls report by the U.S. Labor Department showing that just 160,000 jobs were added to the economy in April, well below Wall Street economists' expectations of 203,000. The total nonfarm payrolls for February was revised downward from 245,000 to 233,000, and the change for March was also revised downward from 215,000 to 208,000. 

The U.S. unemployment rate (U3) remained at 5.0% for April, while the U6 unemployment rate, which accounts for the total unemployed plus persons marginally attached to the labor force and the underemployed, was 9.7% versus 9.8% in March. The labor force participation rate printed at 62.8% in April, meaning 94.04 million Americans, 16 years and older, did not have a job and were not actively trying to find one.

Some Fed officials seemed not to put much weight on data released by the U.S. government. According to MarketWatch, New York Fed President William Dudley said on Friday that while the April jobs gain was “a touch softer” than people were expecting, he was not putting a lot of weight on the data. San Francisco Fed President John Williams, who is not a voting member of the Fed policy committee this year, told CNBC on Thursday that the advance estimate of the first-quarter GDP at 0.5%, released by Labor Department reported last Thursday, was distorted by seasonal factors and growth was actually closer to a 2% annual rate. 

The big picture is that U.S. nonfarm payrolls has declined steadily from 295,000 jobs added in October 2015 to 160,000 added in April 2016, while hourly wages inched up a mere 1.13% from $21.21 per hour to $21.45 per hour during the same period, due in part to a rise in minimum wages in some states and cities.

The 10-year U.S. Treasury Note yield was 1.779% at the close on Friday, down 2.79% for the week. The yield spread between the 10-year and 2-year U.S. Treasury Notes closed at 1.05 percentage points on Friday, after dipping to 0.95 percentage point on March 8, a level not seen since late 2007. The U.S. dollar index bounced 0.92% to close on Friday at 93.883, slightly above the technical support of 93.78.

Since October 2015, the S&P 500 and WTI crude oil price are highly correlated with a coefficient of 0.9 over a 100-day period, where 1 is total positive correlation. The WTI crude oil spot price was down 3.11% for the week, at $44.56 per barrel on Friday, as the U.S. dollar firmed and crude inventory rose above expectations.

The Energy Information Administration (EIA) weekly U.S. oil inventory report on Wednesday showed a build of 2.8 million barrels in the week ending April 29, compared to analysts’ expectations for a 1.4 million barrel build. The American Petroleum Institute (API) inventory data on Tuesday showed a 1.3 million barrel build. The EIA also said the weekly U.S. crude oil production fell again for the fourteenth consecutive week, to 8.825 million barrels per day (bpd) for the week ending April 29, 2016, the lowest level since September 24, 2014, at 8.837 million bpd. Weekly U.S. crude oil output, however, has fallen 8.17% from the peak level of 9.61 million bpd during the week ending June 6, 2015. 

More bullish news for the oil market came from Houston-based oilfield services company Baker Hughes Inc., who said on Friday that the U.S. oil rig count is now down another 4 to 328, a 79.61% drop from the peak number of 1,609 in October 2014. 

Crude oil prices got some support by reports of the uncontrolled wildfire in Canada’s province of Alberta on Wednesday, which shut down one major oil sands mining operation and forced another to curtail production. Canada’s total oil sands production is around 2 million bpd, much of which is exported to the U.S.

According to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) for the week ended May 3, there are 132,020 short positions of S&P 500 consolidated futures, traded on the Chicago Mercantile Exchange by leveraged funds, a decrease of 2,807 short positions from the previous week. This is compared to about 85,065 long positions, down 7,074 from the previous week. The data suggests that hedge funds were increasingly bearish, adding about 4,267 contracts to their net short positions of S&P 500 consolidated futures, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index. 

Technically, the S&P 500 continued to pull back and bounced off the technical support at the 2,041 level. So far, earnings results have been mixed, due in part to a strong U.S. dollar and weak demand abroad. Nonetheless, there is no reason to turn outright bearish yet, as a bullish golden cross, or the 50-day and 200-day SMA crossover, has now emerged. The next head resistance is at 2,081, while support is at 2,012.98, or the 200-day SMA.

S&P 500 Summary: +0.65% YTD as of 05/06/16
Barclay Hedge Fund Index: –0.28% YTD 

Outperforming Sectors: Utilities +12.59% YTD, Telecommunication services +11.49% YTD, Energy +8.73% YTD, Materials +5.86% YTD, Consumer staples +5.12% YTD, Industrials +4.08% YTD, Consumer discretionary +1.25% YTD.

Underperforming Sectors: Financials –3.25% YTD, Information technology –3.32% YTD and Healthcare –4.05% YTD.

S&P 500 ANALYSIS

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