Behind The Headlines, Stocks Stay Overbought Against Trend of Unemployment Claims

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This post is excerpted from the permanent Employment Charts page, which includes numerous additional charts and analysis on key employment metrics. 

The Labor Department reported that the seasonally adjusted (SA) representation of first time claims for unemployment fell  by 27,000 to 341,000 from a revised 368,000 (was 366,000) in the advance report for the week ended February 9, 2013. Because the advance report does not include all interstate claims, it is usually revised up by from 1,000 to 4,000 in the following week. Last week’s upward revision of 2,000 was typical.

The number beat  the consensus median economists’ estimate of 365,000 reported by major business media. The business of seasonal adjustment remains a haphazard and arbitrary process.  Economists are fishing in the dark for a fictitious number that is all but impossible to guess. That’s why the consensus estimate is rarely on the mark.

The headline seasonally adjusted data is the only data the media reports but the Department of Labor (DOL) also reports the actual data, not seasonally adjusted (NSA). The DOL said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 359,428 in the week ending February 9, a decrease of 29,014 from the previous week. There were 365,014 initial claims in the comparable week in 2012.”  [Added emphasis mine]

I adjusted this week’s reported number up by 2,000, based on last week’s DOL revision. The adjusted number that I used in the data calculations is 361,000, rounded.

This year’s filings represented a decrease of  1% over the referenced week last year.  Due to the calendar factors,  the current week would more correctly be compared with the week ended February 4, 2012. The current week is 5 weeks after the first full week and the week of peak claims this year. Using the peak claims week of January 7, 2012 as the benchmark week last year, the like week comparison would be the one ended February 04, 2012. Using that date the decline was 40,000 or -10%, which is consistent with the trend of this series for the past couple of years.

Note: To avoid the confusion inherent in the  fictitious SA data, I analyze the actual numbers of claims (NSA). It is a simple matter to extract the trend from the actual data  and compare the latest week’s actual performance to the trend, to last year, and to the average performance for the week over the prior 10 years.  It’s easy to see  graphically whether the trend is accelerating, decelerating, or about the same.

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The week to week change was an drop of 27,000 in the NSA number.  That was better than usual for the fifth full week after the early January claims peak. Over the previous 10 years the comparable week has usually had decreases. The average change for the 10 years from 2003 to 2012 was a decrease of approximately 8,000.  In 2012 it was 21,000 while in 2011 there was a decline of 24,000. The current week’s performance bested every year of that 10 year period.

From mid 2010 through mid October 2012 the annual rate of change in initial claims had ranged from -3% to -20% every week, with a couple of temporary minor exceptions, including the Superstorm Sandy surge. Since mid 2011 the annual rate of change was within a couple of percent of -10% in most weeks. The trend has been remarkably consistent.

Normally, I would expect some moderation in the rate of improvement in the weeks and months ahead. Further reductions in the number of new claims should be much more difficult to achieve going forward as the year to year comparisons become tougher.

The consensus of economists was that increases in income taxes and spending sequesters would slow the economy. So far, there’s no evidence of that. The Fed’s money printing could be stimulating bubble dynamics, which could cause employment growth rates to increase enough to offset the negative impact of tax increases and spending cuts. The markets may cheer this, but it will be artificial, sustainable only as long as the Fed continues its money printing operations.

Initial Unemployment Claims - Click to enlarge

Initial Unemployment Claims – Click to enlarge

Plotted on an inverse scale, the correlation of the trend of claims with the trend of stock prices over the longer term is strong, while allowing for wide intermediate term swings in stock prices. Both trends are largely driven by the Fed’s operations with Primary Dealers (covered weekly in the Professional Edition Fed Report; See also The Conomy Game, a free report).

Initial Unemployment Claims and Stock Prices - Click to enlarge

Initial Unemployment Claims and Stock Prices- Click to enlarge

In conclusion I will repeat from past weekly updates of the past several months. Not much has changed.

The chart suggests that the market trend is overbought at approximately 1500, assuming that the trend in claims remains relatively constant. This has been a long standing projection. Now that the market has exceeeded this parameter, the question is whether additional Fed money printing will cause those trends to tilt more steeply upward. The year to year trendline in claims has been remarkably consistent. If stocks break out, unless the claims trend begins to show consistent evidence of acceleration, stocks would become more overbought versus that trend, and eventually vulnerable to a big decline.

Under the current QE regime,  the Fed’s balance sheet will grow by a stunning 38% annual rate this year. The Fed is and will be sending lots of cash through the market, with some of it trickling into the economy for the duration of the program. This is unlike 2011 when the market became extended relative to the unemployment claims trend.  Then, the Fed was simultaneously ending QE2, thus starving the monster of its lifeblood. As a result, the market pulled back sharply after reaching the top of the channel.  This year, the Fed is intent on fattening the calf. That would allow the S&P to bump along the top of the channel as long as the jobs trend stays intact. However, any breakout in stock prices without a complimentary acceleration in the the improving trend of claims would lead to a dangerous over-extension in stock prices.

Some bubble jobs will likely be created as the Fed pumps a net of $85 billion per month into the financial markets.  However, the inflation that should accompany the money printing, whether in asset prices, commodities, or in consumer prices, should eventually force the Fed to stop QE. At that point the markets and economy will deal with the hangover from the program. The greater the extension of stock prices above the trend of claims on this chart, the greater the risk of a major correction, crash, or bear market.

[I cover the technical side of the market in the Professional Edition Daily Market Updates.]

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