A Strong Dinosaur

Charts: The S&P 500 closed at 1106, up .5%. The broad index broke above the key 1100 level in big volume, so the uptrend looks to be intact. It hit 1120 and retreated. 1120 is a big resistance level since it represents a 50% retracement of the bear market losses.

Fundamentals: The government’s monthly employment report came in much stronger than expected, shocking the market profoundly. Unemployment dropped to 10% from 10.2%. The Household Survey said over 200,000 jobs were added, blowing away forecasts. The Payroll Survey said that only 11,000 jobs were lost. Revisions to the two previous months added 159,000 jobs to the Payroll survey. This data challenges the entrenched view of weak dinosaur economies vs. strong tigers, which could utterly demolish the dollar carry trade. A stronger than expected US economy will raise interest rates and cause government borrowing costs to skyrocket. If the dollar carry trade unravels in an orderly manner, then domestic stocks like those in the Russell 2000 small cap index (IWM) will benefit. Also, emerging markets not levered to the carry trade will do better, such as Mexico (EWW).

Geopolitics: In Somalia, Al-Shabab has pulled off its biggest and showiest terror attack yet, killing a number of government ministers along with two dozen civilians at a graduation ceremony with a suicide bomber. An influx of Al-Qaeda types is bolstering the bad guys in Africa and is another example of the whack-a-mole effect that comes from the US and Pakistan taking the wood to the bad guys in the Af-Pak region. The far corners of the Earth that will suffer from the whack-a-mole effect are the responsibility of the CIA. It is a good thing that Secretary Gates is a former deputy director of the CIA. He is the right man at the right time and is able to harmonize the Pentagon and the CIA.