Russell slips as jobs glow gives way to profit-taking

Small-cap stocks edged lower Friday, unable to ride out a morning wave of bullish enthusiasm after the monthly employment report showed the U.S. labor market was struggling, but not nearly as bad as feared. In the initial glow of the jobs release, the Russell 2000 (NYSE:IWM) surged to the highest level since early January, but was unable to thunder home on the stretch Friday afternoon, dipping 4.01, or 0.55%, to 725.74.

Although the sloppy close in equities may have taken some of the excitement out of this week’s advance, it should still be noted that the Russell finished out Friday at the highest weekly level since early February. There are very few shorts holding index profits in this market, and if the Russell can sustain upward momentum, those shorts will be forced to buy their way out of losing trades in the weeks ahead.

Back to the actual employment report this morning, the headline figures — the unemployment rate and the payroll number — were both much better than forecast, with the unemployment rate coming in at 5%, compared with the average guess of 5.2%, while the payroll loss for April was reported at 20,000 jobs, compared with the median estimate of an 80,000-job decline.

“The unemployment rate dropped in April because of a temporary surge in household jobs,” Steven Wood, chief economist with Insight Economics, said in an email. “However, the unemployment rate will climb further over the next several quarters as the economy continues to slowly deteriorate.”

Wood clearly believes that the U.S. economy is not exactly free and clear of further downside risk and with consumers struggling against sinking home values, rising energy and food costs, caution seems quite reasonable looking forward. Looking ahead . . .

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