The month of July served up all time highs as Q2 earnings reporting season begins to wind down. For the month, the Dow Jones Industrial Average (chart) closed up 3.50%, the tech-heavy Nasdaq (chart) gained a whopping 6.8%, the S&P 500 (chart) +4.38% and the small-cap Russell 2000 (chart) closed the month up 5.6%. The rally in stocks continue thanks to favorable corporate earnings for the most part, and the Federal Reserve keeping its commitment to do whatever it takes until the economy can stand on its own two feet. Yesterday, after the Federal Reserve’s 2-day policy meeting ended, the central bank reiterated that it would continue its $85 billion per month bond buying program and keep interest rates near zero to help support and strengthen the economy.

That said, August begins with quite the test as all eyes will be on tomorrow’s  jobs report. The July unemployment report should be the most scrutinized report of the year as the Federal Reserve has been on the record recently signaling as to when they may start pulling back on its monthly bond purchases. A stronger than expected report may compel the Fed to begin tapering as early as September. However, if job growth continues to be modest, then I think its safe to say the accommodative policies of the Fed will continue into the foreseeable future. So you may ask what does this all mean to the market? This may become the case where good news in the labor market may be bad news for stocks. I know it seems counterintuitive, however, just the notion in late May that the Fed was considering tapering sooner than later sent the markets down five percent in a matter of a couple of weeks. I think everyone from the hedge fund community to mutual funds to institutional investors and even the individual retail investor have been so reliant on this accommodative Fed, that once the tapering actually begins, we may just see the stock market correction the bears have been anticipating all year long.

Technically speaking, although the markets are seemingly overbought, the key indices are not at extreme overbought conditions, just yet. Let’s take a look at the relative strength index (RSI) on the Dow Jones Industrial Average (chart), the Nasdaq (chart), the S&P 500 (chart) and the Russell 2000 (chart). As you can see, these indexes are trading below the 70 value level which is the level most market technicians consider an extreme level. I personally consider the 75-80 value level as extreme, especially in today’s market environment. That said, it appears there has been some consolidation going on over the past couple of weeks with the aforementioned indexes which have been trading in a pretty tight range.  Just maybe tomorrow’s unemployment report will be the catalyst for stocks to breakout of its recent trading range and begin a new trend. I view a breakdown of the 1650 zone in the S&P 500 (chart) as bearish. However, should the S&P 500 (chart) break and close above 1700 in a meaningful way, we may just see the extreme overbought conditions come into the marketplace as mentioned above. Good luck to all and I wish you all a very profitable month.

All the best 🙂

~George