Life after the bad jobs report?

Commentary: 2010 started off with a bang, as the markets began to move away from some bases they had been building. While the majority of the trading days were relatively flat, there were some large moves in individual stocks for the week. Homebuilders, agriculture, financials and even airline stocks all performed well. Many have been expecting a correction, but for now the strength must be respected. All four major market ETFs are at new recovery highs and every dip has been bought for several months.

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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, broke out of a consolidation in late December, and was having a hard time getting any traction during the holidays. On the last day of the year, SPY fell to the breakout point, threatening a reversal. The first trading day of the year, however, ushered in a gap higher that erased that weak day and followed through to new highs. Currently, SPY is at fresh recovery highs and getting support on each dip.

Source: StockCharts.com

The Diamonds Trust, Series 1 (NYSE:DIA) ETF is also at new highs, although it is really only barely above its base. The weak close on December 31 actually took DIA back into its base and rising 20-day moving average. However, it appears this weakness ended up trapping some shorts and that low is now an important level to watch moving forward.

Source: StockCharts.com

The small caps, as represented the iShares Russell 2000 Index (NYSE:IWM) ETF, have been the stars over the past few weeks as IWM caught up to its peers and surged to new highs. IWM was lagging the other market ETFs, but started to take on a leadership role in November. IWM also respected the breakout area as support, making this level an important area to watch. It is healthy for the markets when leadership comes from more aggressive investments, and as long as IWM is leading, this should bode well for the overall markets.

Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQQ) has also been acting very well, and cleared its base well before the other market ETFs. QQQQ never even seriously challenged the breakout area and has been persistently moving higher. If anything, QQQQ may be starting to get extended. This remains an important group to watch and any weakness in the underlying strength of the markets will likely show up in a divergence from this ETF.

Source: StockCharts.com

Bottom Line
While many have been expecting a deeper correction, the markets are instead moving above their bases. Several underlying sectors are looking healthy as well, although they may be beginning to get extended. Next week will kick off 2010 earnings season and likely usher in an increase in volume and volatility. The one aspect that has been lacking so far this year is volume, and a high volume reversal is the one thing that could derail the early bullishness this year. The initial levels to watch are the recent breakout areas in each of the individual ETFs for a breakout failure.

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