Stocks Rebound Early, Awaiting Fresh Jobs Data

By Joe Mazzola

The final two days of the quarter are here with stocks up early as tech shares rebound slightly from their pullback. Though June has been a tough month, the S&P 500 Index is just 3% off all-time highs, and there've been glimmers of strength in non-tech areas.

"Some of the selloff in the tech space may be related to quarter-end rebalancing by major market players such as pensions and sovereign wealth funds," said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research (SCFR), in his Weekly Trader's Outlook. The focus this week could turn slightly away from tech and toward the U.S. economy ahead of Thursday's June nonfarm payrolls report. That's a day earlier than usual ahead of Friday's U.S. closure for Independence Day.

Major indexes fell Friday and the tech-dominated Nasdaq Composite's losing streak reached five sessions. Choppiness returned as the Cboe Volatility Index (VIX) flirted with 20. Any move above that early this week might signal more weakness for the market, with investors focused again on Treasury yields and oil as the Middle East remains unsettled. The status of the ceasefire is a fresh wildcard after several weekend skirmishes, though the U.S. announced Sunday that hostilities are paused. This appeared to underpin early Wall Street gains.

Three things to watch

Manufacturing, job openings ahead: Jobs aren't the only reports on the near horizon. Wednesday brings the June ISM U.S. manufacturing index, an important metric for an industrial economy that appears to be recovering in a trend that's supported sectors beyond those heavily exposed to tech. What the Federal Reserve decides could be influenced by that and other data, starting with the Job Openings and Labor Turnover Survey (JOLTS) due soon after Tuesday's opening bell. The April reading was 7.6 million, well above expectations, and May's is expected to be in that area as well. These are the highest levels in more than a year, suggesting companies are starting to emerge from the "no hire, no fire" climate that's prevailed. That's not completely clear, of course, but U.S. jobs growth is also up three months in a row. Analysts expect the June nonfarm payrolls report Thursday to show lower gains than the 172,000 seen in May. Early consensus is 110,000, which would still be adequate to keep pace with population growth.
Yields set tone: Last week's rotation out of tech and into sectors like industrials and health care could get a second wind in coming days, but it depends partly on the path of Treasury yields. Which means, to some extent, it depends on crude oil. Treasury yields seemed less correlated with crude earlier this month than they were back in May, but they tracked crude down last week as the price of oil dipped to nearly pre-war levels. If oil rises, the 10-year Treasury note yield could, too, possibly hurting chances for a non-tech rally. When the yield has been below 4.5% lately, money has gone into sectors beyond tech. When yields climb to 4.5% or higher, money gravitates back toward tech. Jobs data could have an impact on the path of yields, which are down over the last week despite growing expectations of a possible Federal Reserve rate hike sometime this year. Fed Chairman Kevin Warsh speaks at a forum in Europe Wednesday.
Line in the sand for indexes: Technically, both the S&P 500 Index and the PHLX Semiconductor Index (SOX) trade near key junctures that could determine where they head prior to earnings season starting in mid-July. The S&P 500 closed Friday just below its 50-day moving average for the first time since early April. Several closes under that line, now at 7,363, lasting more than a few days could represent a signal change. The Nasdaq-100^® rests just above its 50-day moving average to start the week. And the SOX closed Friday below the closely watched 21-day moving average. The SOX also drifted below that earlier this month for a couple days but regained its footing, seen as technically positive at the time. Now it's losing steam and at one point last week was down nearly 10% intraday from last Monday's peak, the definition of a correction. "While the broadening of the rally appears to be intact, and lower oil prices and yields are net bullish, I'm concerned about tech in the near-term," my colleague Peterson said. "The sector may be susceptible to some additional deleveraging." Margin debt in the U.S. hit a record $1.42 trillion in May.

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