Much ink is spilled and airtime filled analyzing and predicting the monthly employment and unemployment situation. After days of anticipation, the market rally does what’s expected. What data points go largely unnoticed and how do jobless numbers affect the market’s performance?
Another month goes by and another unemployment report deciphered. Is there more to this month’s report than the 9.4% headline number? Unless you are content with the information spoon fed by the financial media, you’ll find the data points revealed in this article rather interesting.
The only other Wall Street ritual that tops monthly unemployment reports is earnings season. Like any other ritual, it comes with many myths and fables attached. The most common one is that unemployment directly affects stock prices.
Unemployment Myth Busted
If you base your investment decisions on today’s release, you may want to revisit the market’s performance following last month’s release (published on December 3, 2010).
The U-3 unemployment rate spiked from 9.6% to 9.8%. This was a huge disappointment, yet major stock indexes a la S&P, Dow and Nasdaq rallied. What caused this unexpected reaction? The answer can be found in technical analysis.
The technical setup going into last month’s unemployment release (published on December 3) was predominantly bullish. With the S&P at 1,225 in early November, the ETF Profit Strategy Newsletter highlighted important support at 1,165 – 1,170 and on November 7 stated: “Any correction that doesn’t drop below 1,165 will likely result in new highs” with resistance at 1,267 (revised to 1,281 on December 12).
As the chart below illustrates, the S&P tested support on five occasions and set the stage for future gains. That’s why despite the dismal jobless numbers, stocks spiked on the day of the release and continued higher.
Before we talk about the technical set up going into today’s release, let’s examine some unknown but important details about today’s unemployment report.
What the Headlines Won’t Tell You
The Bureau of Labor Statistics (BLS.org) publishes more data than just the heavily quoted U-3 unemployment headline number (currently 9.4%).
In fact, if you do some surfing on BLS.org you will find that the headline number is deceptive at best and inaccurate at least. Below are some statistics that put America’s job market in perspective.
According to the BLS, the real unemployment rate (U-6), which includes workers who stopped looking for jobs or had to settle for part-time jobs – is at 16.7%.
One of the most remarkable BLS data points on the BLS site is the average number of weeks workers are now unemployed. The jobless are unemployed for an average of 34.2 weeks. As the chart below shows, this is the second highest reading in the survey’s 63-year history (all-time high was 34.8 in July 2010).
Along the same lines, the number of workers unemployed for more than 27 weeks (usually unemployment benefits cease after 26 weeks) is near its May 2010 all-time high.
A Painful Jobs Misconception
The Bush tax-cut extension led many to believe that unemployment benefits have been extended beyond the 99 weeks (26 weeks state-funded plus 73 weeks federal benefits) available to the 25 worst hit states. This is not correct.
According to CNBC, no benefits will be paid once the 99-week period is exhausted. As per the extension, however, the jobless will continue to receive up to 99 weeks of unemployment checks.
Over the past three years, the unemployed have collected about $320 billion in jobless benefits. About two million “99ers” received their last benefit check around Christmas.
A Shrinking Workforce
It is estimated that about 150,000 “youngsters” enter the work force every year. That’s why the work force has steadily increased since 1948. Courtesy of the 2008 bear market, the workforce has actually been shrinking as discouraged workers drop out of the statistics .
Discouraged workers are those who stopped searching in the last four weeks. Excluding them from the workforce and the unemployment equation artificially lowers the U-3 unemployment rate.
Making Sense of What Doesn’t Make Sense
Based on U-6 numbers, since December 2006 as many 13 million Americans have either lost their jobs, or have been downgraded. Meanwhile food stamp recipients have mushroomed by ten 10 million.
Nevertheless, stocks have shrugged off an avalanche of bad news and continue plowing ahead towards new highs. Does that make sense?
It does when you include the Federal Reserve and it’s quantitative easing program in this lopsided equation. The Fed has a history of creating and ignoring bubbles. The 2000 tech bubble came and went and was followed by the 2005 real estate bubble.
The 2005 real estate bubble was somewhat cushioned by the 2007 financial bubble. The 2007 bubble bust expressed itself fully until the Fed started inflating yet another bubble – the QE1 and QE2-based “great” new bull market.
The Technical Set Up
Looking at the long-term picture, there is reason to be skeptical about the growth potential for U.S. stocks. But if you want instant gratification – as most investors do – what’s the technical set up for the coming weeks?
Looking at the market’s internal indicators, we note that momentum is strong but breadth is weakening. Sentiment – one of the most reliable indicators in the investment universe – is extremely bullish, which is bearish for stocks.
Prior instances when the ETF Profit Strategy Newsletter noted overheated excitement for stocks was in January 2009, January 2010, and April 2010. Another bearish factor is the new January effect that’s seen stocks decline each January over the past three years.
Additionally, the S&P is about to reach the measured upside target of a W pattern (December 12 ETF Profit Strategy Newsletter) and a host of other resistance levels.
In summary, momentum and Fed induced liquidity point up, but sentiment gauges and some technical indicators convey a deeply bearish message.
The best way to trade in this environment is to let the market speak and carefully watch important support and resistance levels. Failure to break resistance levels combined with an inability to remain above support have been recipes for disaster in the past, especially with bullish sentiment extremes.
The ETF Profit Strategy Newsletter provides the most significant key levels, along with a complete technical picture twice a week.
This article is brought to you by Simon Maierhofer of ETFguide.com. ETFguide is the information leader on exchange-traded funds because of its vendor-neutral approach and its progressive reporting style. Unique features include an ETF bookstore, a monthly e-mail newsletter, and subscription based ETF portfolios.