Major averages rose on lower volume, continuing their uptrend after a week that included a raft of earnings reports, a Fed policy announcement, and the all important employment report. The Fed remains dovish with respect to the continuation of quantitative easing, earnings were healthy overall, and the employment report showed inherent weakness as the declining unemployment rate was largely due to people dropping out of the workforce, a sign of desperation rather than recovery.
As the uptrend continues, the number of actionable stocks has increased. Friday's report, for example, contained four pocket pivots and one buyable gap up which we thought all had the fundamentals and technicals of leadership. Leading stocks tend to well outperform the major averages. That said, the number of distribution days has increased and the averages are up a fair amount for the year. While cases could be made that mediocre performances in the market averages may result for the remainder of the year, quantitative easing makes the current environment highly unusual. The maxims "Dont fight the trend" and "Dont fight the fed" both hold much truth.
Friday's employment report showed the U.S. created 162,000 jobs in July and the unemployment rate fell to 7.4%, the lowest level since December 2008, partly because more people dropped out of the labor force. Job gains for June and May were also revised slightly lower. Economists had expected an increase of 180,000 jobs last month. Futures sold off at first then rallied to finish near their intraday highs. Unemployment remains an issue since the lower 7.4% figure represents desperation rather than people being hired as more people dropped out of the work force. Thus the Fed will have to continue to print money until more tangible signs of a recovering economy are evident.
YY Inc (YY) had a buyable gap up on a strong earnings report. That said, it closed its gap to finish near the low of its trading range. This high volume reversal can be quite bearish. Those who bought the gap up could either sell when the gap closed, or near the end of the trading day when the stock looked to close near the low of its range.
Chuy's Holdings (CHUY) had enough volume for a pocket pivot, but a low quality one because it came straight up off the bottom after a fairly sharp correction, thus it probably needs to do more work if it is going to sustain an uptrend. Also, it is a small cap so subject to greater volatility.
We reported on Yelp Inc (YELP) on its buyable gap up on Thursday, and it is now quite extended from its entry point. If it were to constructively retrace on lower volume back into buying range, which would be determined by your risk tolerance levels, assuming a sell stop 1-2% under the low of its gap up day, it could be bought.