February 7, 2014 (Chinavestor) The market is on fire despite meager jobs gains. What's the real story behind the rally? The answer is simple: a technical correction after the Dow Jones Industrial Average (INDEXDJX:.DJI) hit an extreme oversold position.
Chinavestor has been tracking trading ranges and extreme positions of the Dow Jones Industrial Average (INDEXDJX:.DJI) for a long time. The chart is clear that the index hit an extreme oversold position after the 330 points drop on February 3rd. The index has sunken to the low end of its trading range for the fist time in the last 52 weeks. This implies that the index was ready to make a comeback, something we have been witnessing for the last two days.
For those who may argue that sound jobs creation was behind the latest rally, the following chart is worth a 1000 words.Non-farm payrolls rose 113,000 for the month of January, far less than average jobs creation for the few two years. We have argued that the economy needs to add 200,000 jobs a month to make up for the 2008-2010 losses. The U.S. economy lost 8.67 million jobs during those years. The American economy has added 7.61 million jobs back so far. Considering that overall population has been growing steadily in the last 8 years, the economy really needs to add 200,000 or more jobs a month to get back where is was before the financial meltdown. With that in mind, last December and this January jobs numbers are really disappointing. So what's behind the Thursday-Friday rally this week? A technical correction. The real question is: where is the Dow Jones Industrial Average (INDEXDJX:.DJI) going to go from here?