It’s All About the Fed, All the Time

Last week, a downbeat non-farm payrolls report failed to prevent prevent the stock market from closing at new record high levels.

The sun used to rise and set on the stock market, depending on the results of the monthly non-farm payrolls report from the U.S. Department of Labor’s Bureau of Labor Statistics. On Friday, it made absolutely no difference.

Despite the huge shortfall, with only 162,000 new non-farm payroll jobs added in July — missing expectations of 185,000 — the Dow Jones Industrial Average and the S&P 500 Index finished the session at new record-high closing levels. Surprisingly, the Russell 2000 Index — which hits record highs with the regularity of a geriatric on Metamucil, prunes, and yogurt — missed a new record close by a gap too small to accommodate a nanoparticle.

The payrolls disappointment cloud had a silver lining because most investors believed it would discourage the Fed from being too quick with the taper trigger. Bad news for employment is good news for the longevity of the quantitative easing program.

On the other hand, the drop in the labor participation rate from 63.5 percent to 63.4 percent helped to push the unemployment rate down from 7.6 percent last month to 7.4 percent. Keep in mind that Ben Bernanke has been discussing a 7 percent unemployment rate as a threshold for beginning the taper.

The Dow picked up 30 points to finish Friday’s trading session at another record-high close of 15,658.36 for a 0.19 percent advance. The Dow retreated 32 basis points from a new intraday record high of 15,658.68. The S&P 500 rose 0.16 percent to finish the week at a record high of 1,709.67. The Nasdaq 100 climbed 0.55 percent to finish at 3,143. The Russell 2000 actually retreated by less than one basis point from Thursday’s record-high close of 1,059.88 to end the week at 1.059.86. Wow!

In other major markets, oil (NYSEARCA:USO) declined 0.86 percent to close at $37.94. Transports ran out of gas on Friday, with the Dow Jones Transportation Average (NYSEARCA:IYT) declining 0.22 percent.

Technical indicators reveal that the S&P 500 continued to soar above its 50-day moving average of 1,647 after finishing Friday’s session with a 0.16 percent advance to its latest record high of 1,709.67. Its Relative Strength Index rose from 69.25 to 70.10. With the S&P now above the “overbought” threshold of 70, many investors could take that as a “sell” signal, resulting in a pullback. After dipping below the signal line on Wednesday, the MACD has climbed back above it, suggesting the possibility of a continuing advance.

However, all of this comes on weak volume and declining momentum and so next week will be an important one for the bulls to assert their authority and remain firmly in control of today’s market.

Bottom line: The disappointing report on July non-farm payrolls failed to stop the Dow and the S&P 500 from hitting new record highs as investors expected the report to motivate the Federal Reserve to delay the tapering of its bond-buying program. As has been the case in recent months, it’s all about the Fed, all the time. Nevertheless, fundamentals are working to reassert their will on the market and all bubbles always end when fundamentals eventually prevail.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

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