A preponderance of bearish sentiment, as we noted in Thursday's live market webinar, set the crowd up to be fooled on Friday following a stronger-than-expected jobs report. Analysts were expecting 168,000 jobs but the report printed 336,000 jobs, twice what was expected. However, those numbers disguised the fact that in the latest jobs report's fine print, 850,000 full-time jobs were lost while 1.127 million part-time jobs were added. Part-time jobs are the reason why the report printed such a strong number of 336,000 jobs. Just after the jobs report hit, futures markets sold off because the strong number pushed the odds of another rate hike higher. But after the opening bell, markets rose to finish the day appreciably higher for the aforementioned reasons.
In our Thursday webinar we noted an extreme spikes in the CBOE Total Put/Call Ratio up to 1.59 on Thursday. This, combined with high levels of bearishness and the sudden evaporation of bulls among individual investors as measured by the American Association of Individual Investors (AAII) sentiment surveys and bearish positioning of active investment managers per the National Association of Active Investment Managers (NAAIM) set the stage for an oversold rally as everyone had become a bear.
At the same time, the NASDAQ Composite was in a potential U&R position along the mid-August lows while the S&P 500 was testing support along its 200-day moving average. In essence, sentiment and technical action, including a broad number of oversold situations among short-sale target stocks that we have been campaigning on the way for more than a month now came together to produce a logical bounce that was catalyzed by a misleadingly "stunning" jobs report. Friday's action mostly looked like a typical oversold short-covering melt-up where volume was not as robust as we might expect to see on a day like this. For now, the indexes are bouncing and we will see just how far this reaction rally carries.
Short-sale target stocks that have produced reasonably strong profits over the last month since we began reporting on these names bounced sharply today as would be expected. Unless one were quick to get long early in the day, these names are now predominantly extended and it is a matter of watching to see how things evolve from here as these moves may be short-lived. We will, however, keep an open mind as we assess the technical action going forward as objectively as possible.The Market Direction Model (MDM) remains on a SELL signal.