How do fish get caught? They open their mouth. How do investors get ensnared or misled? They believe in non-existent phenomenons like a “jobless recovery.”
Surprising as it is, for nearly a year, investors have shrugged off mounting jobless claims and rising unemployment as an ingredient that is not really required for an economic recovery.
Yesterday’s (2-4-10) announcement by the Department of Labor that claims for unemployment benefits rose by 8,000 to 480,000 sent stocks spiraling.
The Dow Jones Industrial Average (DJI: ^DJI), S&P 500 (SNP: ^GSPC), and Nasdaq Composite (Nasdaq: ^IXIC) lost about 3% each, marking the first time in months that concerns over unemployment were raising suspicion.
Does that mean that the trend of the “new bull market” in stocks has changed? Or are we in for further declines?
The real numbers
Today’s headline numbers report was that the unemployment numbers, "surprisingly fell to a five-month low of 9.7%," according to today’s government report.
In reality, unemployment spiked to an all-time high of 18%. Yes, 18%! This is the official number reported by the Bureau of Labor Statistics (BLS).
The BLS publishes different sets of data on a regular basis. The main focus tends to be on the U-3 unemployment rate (currently 9.7%, seasonally adjusted).
U-3 is the “official” unemployment rate and illustrates total unemployed persons as a percentage of the civilian labor force. U-4 is another category that includes unemployed workers plus discouraged workers. A discouraged worker is someone who’s available to work but has stopped actively seeking for work.
U-5 unemployment includes the number of unemployed workers, plus discouraged workers, plus marginally attached workers. A marginally attached worker is someone who is able and willing to work but is not actively seeking work.
U-6 is as close to the real unemployment figure as government reporting gets. This number includes unemployed workers, plus discouraged workers, plus marginally attached workers, plus workers that are forced to work part-time because they are not able to find a full-time job. Put another way, it's the most realistic picture of today's job market as any.
According to the Bureau of Labor Statistics, the number of U-6 unemployed workers is 18% (not seasonally adjusted – 16.5%). This is the highest number of record.
Keep in mind that neither of the above categories encompasses another important element of the labor force; “unemployed self-employed" workers. If you’re a handyman or contractor next door, or a small business owner who can’t secure work, you are not included! Adding these folks to the mix would put the real unemployment number above 20%!
No one is spared
Unfortunately, job cuts have affected every industry sector. Job cuts in the technology sector (NYSEArca: XLK) have reached the highest level in four years.
Even WalMart, a low-price leader and a virtually recession proof outfit, continues to cut jobs. This trend has spilled over and continues in the entire consumer staples (NYSEArca: XLP) and consumer discretionary sector (NYSEArca: XLY). Ericsson and Pfizer are just a few companies eliminating employees at a record pace.
According to a report by global outplacement firm Challenger, Gray & Christmas, U.S. employers began the year 2010 by announcing 71,482 planned job cuts, the highest tally in five months. The report, however, said that the increase in layoffs should not be seen as a sign of “recession relapse.”
How do you define a recession relapse? How do you even figure a recession is over?
There has been a huge disconnect between what’s happening on Wall Street and on Main Street. Since March 2009, the U.S. stock market (NYSEArca: TMW) has been steadily rising, as has unemployment. You’d expect stock prices to go up and unemployment claims to go down, but that hasn’t been the case.
When putting the pieces together, it helps to understand why stocks have been able to stage a relentless ten-month rally.
From October 2007 to March 2009, the Dow Jones (NYSEArca: DIA), S&P 500 (NYSEArca: SPY) and secondary indexes like the MidCap SPDRs (NYSEArca: MDY) and small caps (NYSEArca: IWM) have lost more than half their value. Financials (NYSEArca: XLF) lost over three quarters of the market capitalization.
In March, investor pessimism has reached an extreme of historic proportions. In fact, on March 9th, the Wall Street Journal made a case for Dow 5,000 and Goldman Sachs slashed earnings growth by over 37%.
Exactly at that time, the ETF Profit Strategy Newsletter send out a Trend Change Alert (on March 2, 2009) predicting the biggest rally since the October 2007 all-time highs with a upper target range of Dow 10,000. For 18 months (10-2007 – 3-2009) investors had resisted their urge to buy. This was about to change.
I want what I want
It was this pent-up urge to buy that sent stocks higher. No bad news could prevent the market from rising. Investors simply wanted to own stocks again and recapture some of their hefty losses.
Just as extreme pessimism marked the bottom of the down-turn, the ETF Profit Strategy Newsletter predicted that extreme optimism would make a top. In fact, the late stages of this rally could be identified by a “the worst is over” sentiment.
No progress but much change
Throughout the fourth quarter of 2009 stocks moved higher. Even though the major indexes gained only a few percentage points from October – January, the resilience against any bad news had transformed a record number of investors into long-term bulls.
By early January, investor optimism had reached extremes not seen since 1987, 2000 and 2007 (depending on the data used). For the first time investors had more money invested in stocks than at the height of the technology boom in early 2000.
For contrarian investors, this was a huge red flag. On January 15, 2010, the ETF Profit Strategy Newsletter’s Market Meter stated the following: “Dow 10,710 and S&P 1,148 might very well mark the high water mark for 2010. A major trend reversal at current prices would be consistent with all our indicators.”
The market staged one more minor high two trading days later and has fallen precipitously since. Recommended ETFs like the Direxion Daily Financial Bear 3x Shares (NYSEArca: FAZ), UltraShort QQQ ProShares (NYSEArca: QID), and UltraShort Financial ProShares (NYSEArca: SKF) have gained 10%, 15% and more.
The one constant
On a daily basis, economic news comes and goes. Some will influence the market, others won’t. If you’ve been following news reports and corresponding stock prices, you will have noticed that the correlation between good news and higher prices or bad news and lower prices is less than obvious.
What remains constant, however, is the pattern of behavior investors have established for hundreds of years. Extremes in sentiment which invariably result in extreme reactions. This is called the herding effect and is rather predictable.
Crowd behavior of investors is largely driven by perception. The perception that stocks will continue to rise is starting to change, if it hasn’t already. Soon investors will refocus on valuations to see if a stock is worth its price tag. It was the return to due diligence that pummeled stock prices throughout 2008.
Interestingly, the 2008 declines were also preceded by extreme optimism and a feeling that stocks have nowhere to go but up.
Historically, stocks are grossly overvalued and due for another major correction. How major?
The ETF Profit Strategy Newsletter includes a detailed short, mid and long-term forecast along with a target-range for the ultimate market bottom based on historically indisputable evidence.