US Market Review For the Week of October 13-17; The Rebound Potential Is Increasing

     Last week put to rest any doubt about whether or not the market was in the middle of a correction.  Although the SPYs ended the week down only 1.09%, the index broke key support at the 200 day EMA, with the NASDAQ falling to that key technical line.   While the IWMs rebounded, closing right at the previous support level in the 106/107 level that defined their near year-long sideways consolidation, that indexes momentum (MACD) is still declining.  And the mid-cap and small cap ETFS confirmed the downtrend.  But the sell-off is hardly in bear market territory as the SPYs are only down 5.7% with the QQQs and IWMs down a bit over 6%.

     But the most important charts of the week come from the treasury market, beginning with the weekly IEFs:

 

After hitting the 98 level at the beginning of the year, prices have been on a slow but steady climb.  Notice the lack of any meaningful correction.  Instead, prices simply continued to grind higher with a slight but noticeable increase in volume since the first of the year with increasing momentum. 

And the TLTs which represent the long end of the curve, are telling the exact same story.  But both the IEFs and TLTs are nearing resistance levels established earlier this year.  And the 10 year is at 2.22 with the 30 year at 2.98 -- pretty high levels.  This may indicate the treasury rally is nearing its high.

While he's not a trader per se, Krugman hits the nail on the head in explaining the importance of the above chart:

Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending — have fallen sharply. This tells us that markets aren’t worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls.

     In fact, with the exception of the junk bond market which has sold off recently, the other bond markets are in the middle of a decent rally:

The best-performing bond ETF for the last year has been the TLTs which have risen 17%, with the municipal market a distant second coming in a bit below 10%.  The intermediate corporate market has gained ~7.5% with the 7-10 year treasury up 6%. 

     Let's take a step back and look at some of the factors that may lead to a bond market rally:

     1.) When there is no or little fear of inflation.
     2.) When economic growth will be insufficient to provide an environment in which companies can increase revenues. 
     3.) When the annual yield payments will be at least on par with and hopefully higher than the combination of dividends and capital gains associated with comparable equities
     3.) When the risk premium offered by equities is insufficient compensation
     
Clearly number 1 is in play, as global inflation is minimal: the EU is near deflation, with no major economy is experiencing even an inflationary spike (Inflation is an issue in Russia, Brazil and India, but their respective central banks have acted aggressively in raising rates).  With inflation low, even a 2%-3% is a fair return in a slow growth environment, which leads directly to point number 2.  International markets have realigned to a "risk off" trade, caused by a realization that the EU may be in or near a deadly combination of recession and/or deflationary spiral.  This has been exasperated by negative news from Japan and Russia, leading investors to rethink their global growth calculus.  While the S&P is yielding a little over 2%, it is also fairly expensive by other multiple valuations.  Combine the high valuation levels with a potential global slowdown on the table -- and a corresponding slowdown in earnings -- and a safe asset with a comparable yield looks a bit more attractive.  And the risk off trade has already been alluded to.  Over the last month or so it's just gotten riskier.  Major international organizations have lowered their growth forecasts, military conflict is increasing and we have a bona fide global health problem.  Those three factors combined would scare any trader at least a bit.         

     All that being said, let's now turn to the equity markets, beginning with the weekly SPY chart:

 

 

Technically, the underlying environment is clearly bearish with a declining MACD and RSI, increased volume on the sell off, rising volatility and prices breaking the 200 day EMA.  But the 200 day EMA often acts as a center of gravity; when prices break below that level, they usually respond by rallying back to that point (which they did on Friday).  In the current market, that's usually because of trading programs.  But, irrespective of the reason behind Friday's bounce, bounce it did.

 

And breaking the 200 day EMA is not the bearish indicator you might think:

 

In fact, some technical analysts consider breaking below the 200-day moving average to be the official end of a bull market. So, at least according to this definition, we’re now in a bear market. (The usual definition is a 20% or more decline.)

The situation may not be that dire, however. While market-timing systems based on the 200-day moving average had impressive records in the earlier part of the last century, they have become markedly less successful in recent decades — to the point that some are openly speculating that they no longer work.

In fact, since 1990 the stock market has actually performed better than average following “sell” signals from the 200-day moving average.

 

	Next four weeks	Next 13 weeks	Next 26 weeks	Next 12 months
Following ‘sell’ signals from 200-day moving average	2.5%	5.4%	6.1%	9.7%
All other days	0.9%	2.7%	5.6%	11.7% 

 

The full article is definitely worth a read.

 

    Other charts are also pointing to the possibility that we may see at least a stabilization around these levels.

 

 

Above is a 30 minute chart of the IWMs -- the average that led the market lower, making it a decent potential leading indicator.  Since trading on the 9th, prices have been moving a bit more sideways, consolidating between the ~104 and 109 level.  Prices aren't forming a definitive pattern, making this a fairly week technical observation. 

But we're also seeing it in the IWCs -- a micro-cap ETF.  Both it and the IMWs (above) also broke through their respective 200 minute EMAs as well, a potentially bullish sign.

Adding onto the theme of a potential rebound next week, consider this chart:

Above is a three year graph of both the NASDAQ and NYSE stocks below the 200 day EMA (ignore the right hand side).  Both are at very low levels, indicating the market, at least from this metric is very oversold.  These types of conditions usually lead to traders nibbling on what they consider to be undervalued shares, as shown in the following chart:

Above is a chart with the SPYs on top and the percentage of stocks below the 200 day EMA on the bottom.  For the last three years, this level of oversold (at least on the stocks below their 200 day average indicator) has usually led to a market rebound.  And the current level on the 200 day EMA -- which we see at the end of 2011 (far left of the chart), led to the strong spring rally in 2012.

And finally, let's place this sell-off against the general US economic backdrop as expressed in the Fed's Beige Book which was released on Wednesday:

Reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book. Moderate growth was reported by the Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while modest growth was reported by the New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts. In the Boston District, reports from business contacts painted a mixed picture of economic conditions. In addition, several Districts noted that contacts were generally optimistic about future activity.

The market is a leading indicator.  But there is nothing in the fundamental US economic picture indicating we're near a recession.  As I noted earlier this week, the leading and coincident indicators are in good shape, and consumer spending is at decent and sustainable levels.  That means traders aren't selling because a recession is around the corner.  Ultimately they're readjusting portfolios.  That arguably puts a higher potential bottom on the chart.

     A rebound certainly isn't guaranteed.  There is clearly a big change in the risk calculus caused by the EU, Japan and increased military conflict.  And those external events can have a domestic impact in an increasingly inter-connected world leading to lower corporate earnings and, by extension, equity prices.  It's also possible that there is simply too much downward momentum baked into the current market environment to stop now.  And, honestly, considering the overvalued nature of most shares, that wouldn't be a bad thing.  But the US markets are getting caught up in a sell-off that is arguably more globally based, while the US economy isn't showing any recessionary signs.  And there are also very important indicators pointing to oversold conditions.   Overall, the possibility for a rebound has at least increased.



    

Weekly indicators for October 16-20 at XE.com

 - by New Deal democrat

My Weekly Indicator post is Up at XE.com.

This week, at least, it turns out the US really is exceptional.

Housing permits still say: deceleration not DOOM

 - by New Deal democrat

Housing permits are one of the best long leading indicators there is.  They give us a good read on the economy 12-18 months out.

Here's a graph of permits since the beginning of 2011:

As you can see, the pace of growth started to slow down heading into 2013, and for the last 15 months they have gone sideways with a slight upside bias (in September, like almost every other month this year, they were just slightly positive YoY).

The bad news is, this is strong evidence that the economy is probably decelerating by now, and that deceleration will continue for awhile.  The good news is, there has never been a recession without permits falling at least 175,000 from a recent high.  At their worst reading this year, they were only down about -130,000 from their 2013 high.

The recent economic news, whether retail sales, or industrial production, or jobless claims, or interest rates, or whatever else you can think of, simply is not consistent with any actual downturn in the US in the near future.

US consumers paying the least for gas in nearly 4 years

 - by New Deal democrat

This post is up at XE.com.

The best way to look at this is,how much of their disposable income do US consumers have to spend on gas?  When gas prices go up, consumers have less to spend on everything else, and according to research performed by UCSD Professor James Hamilton, if there is a sharp spike, consumers tend to cut back spending by about $2 for every $1 more they spend paying for gas.

Conversely ....

Quick Technical Update on the SPYs

 

 

Above is a yearly chart of the SPYs with Fibonacci lines and fans drawn from the lowest point to the highest on the chart.  Prices are now in the middle of both the Fib lines and fans.  In addition we are just a bit below the 200 day EMA, which usually works like a center of gravity for prices.

 



Jobless claims at 264,000 set new low

 - by New Deal democrat

The 4 week moving average also set a new post-recession low.

But, oh yeah, we're sliding into recession. Sure.  Sweet jeebus, Doomers are stupid.

Neil Irwin of the New York Times has never heard of this thing called "gasoline"

 - by New Deal democrat

Today Neil Irwin of "the Upshot" tells his readers in the NYT that:

You knew all that back in December, so you would have expected that interest rates would be steady or even up significantly this year. And you would have been very wrong: Ten-yearTreasury bonds yielded 3 percent to start the year, a figure now down to 2.2 percent.

So something else is going on unrelated to the Fed or to the growth picture in the United States. And it seems to involve the outlook for inflation. 

O]the last few months [there] has been ... a sharp drop in inflation expectations. But why would that be? After all, standard economic theory would suggest that if the economy is strengthening, it should push up inflation. Workers have a better shot at getting a raise now that the unemployment rate is under 6 percent than they did when it was double digits, for example.

 That’s true, of course, but the United States is no island. And right now, there are some powerful forces pulling prices down from around the world.

Hers's a clue as to what "something else is going on."  First of all, my long leading indicators are mixed, and literally none of the short leading indicators have rolled over.

Now, to the point:  when the Fed announced it was considering the "taper" in May of 2013, Treasury yields jumped from 1.5% to over 3.0%.  In short, they grossly overreacted and have been compensating for that all of this year.

Since 1974, consumer inflation in the United States has always and everywhere been about the price of Oil.  Here's a graph of core (i.e., ex-food and energy) vs. headline inflation from Doug Short:

With Europe and possibly China weakening, the US looks pretty good.  Hence the flight to the safety of US Treasuries.

As a result of which, there has been a boomlet in refinancing mortgages, not to mention the money people who buy gas are now keeping in their pockets to be saved or spent otherwise.

Apparently Neil Irwin has never heard of this.

The US Economy Is In Decent Shape

This is over at XE.com

In saying the US economy is in "decent shape" I am not saying it is without problems.  Like most advanced economies, the employment situation could use improvement, and the lack of meaningful wage growth could crimp the expansion going forward.  But, the leading and coincident indicators say that for the next 6-9 months we can expect slow but steady growth.

The bond market: deceleration not DOOOOM

 - by New Deal democrat

I have a new post up at XE.com discussing the message of the bond market.

Russia: The next Big Problem Economy

This is over at XE.com

US Market Review For the Week of October 6-10.

     For the last 3-4 years, central bank created liquidity has been pumped into the equity markets as investors sought higher returns.  There were other reasons for the post-recession rally as documented by Josh Brown over at the Reformed Broker:

1. Everyone was underinvested in stocks, overly invested in cash, gold and bonds.
2. The Fed was furiously pumping dollars directly into the investment markets, fueling all manner of buybacks, IPOs and raised dividends.
3. Sentiment was absurdly pessimistic, with Wall Street, institutional investment managers and retail players negative on equities.
4. US companies were consistently smashing expectations and raising guidance for the future.
5. The rest of the world began reporting improving economic fundamentals.

But while this week's sell-off has garnered headlines, it actually started in Europe over the summer:

 

 

 

Above is a performance chart of major EU ETFs.  Italy (red) started to sell off in June, followed by Spain (green), Germany (black) and France (purple) in July.  While Italy's early start could easily be interpreted as simple statistical noise, the follow-through from Germany and Spain in July should have alerted adept traders that something was up.

 

  

And by September, the sell-off was broad-based globally.  Canada, the UK and Australia (blue, green and black, respectively) all joined the sell-off.  Most of these markets have dropped at least 10%, placing them in correction territory.  And some (Australia in black, Canada in blue) are nearing bear market territory (a 20% correction).

 

     I documented the global change in investment calculus last week, highlighting the impact of increased geo-political risk and the declining economic prospects of the EU, Japan and to a lesser extent, Australia.  Over the last few weeks, these developments have been reflected in various equity indexes, leading to the overall decline in numerous global ETFs.  But the US economy has the ability to continue growing despite an EU slowdown.  True, it will be slower growth.  But it won't be fatal.  This is probably why the SPYs have not sold off to the same degree as the other international indexes (see the purple line in the above chart).

 

     Let's now turn to the charts.

 

 

 

     Perspective is a very important element of chart reading.  And to those who looked at the SPYs 30 minute chart (above) over the last few weeks, the latest market developments would have been less of a shock.  The index crossed below the 200 minute EMA on September 22 and have hit that level of resistance on four separate occasions since, only to fall back.  The biggest fail occurred on the 9th when the market continued its sell-off after a post-Fed Minutes rally.  But pay particular attention to the give and take between the bulls and bears in the above chart.  Sharp-sell offs have been met with strong buying activity which indicates there are plenty of people who see value at current price levels.

 

      But there are other more negative technical developments to consider as well coming from the weekly charts.

 

 

The biggest is the IWMs (Russell 2000) drop though support at the 106/107 level.  This index has been consolidating between the 106/107 level on the lower end and the 119/120 level on the upper side for most of this year.  Several bloggers have highlighted this development and done some great supporting research, with the following overall conclusion:

 

Like most things in the stock market, small cap underperformance is cyclical and quite common. There is no conclusive evidence that it has to lead to a big correction or end of the bull market. Perhaps the best we can say is: “2015 is likely to be a good year that is maybe possibly slightly less good than an average year”.

 

 

 

The Russell 2000, however, is not the only weakening technical chart.  Another potential technical victim is the SPYs, which are also nearing their multi-year trend line (see above).

 

 

 

And the weekly Dow has already broken through one support line (top chart) with the NASDAQ sitting at long-term support (bottom chart).  Although both charts have longer-term support lines available, bear in mind that both these longer-term trend lines are weaker as they are not connecting any lows occurring after the summer of 2013.

 

 

 

But the US equity sell-off is hardly fatal.  The worst hit is the Russell 2000 (red line above) which has dropped about 14%.  But the other indexes (DIA, SPY and QQQ) have only dropped between 4%-6% since the beginning of September, meaning that none are even in correction territory yet. 

 

But that doesn't mean we won't get there in the short run.  The global sell-off isn't going away soon, largely because of the degradation in international growth prospects.  Safe haven flows are increasing as well, as seen \by the rising US Treasury market:  

 

 

 

But in the longer run, the US economy is still in good shape.  There has been no meaningful negative economic events indicating an imminent slow-down.  Consider the following from the Conference Board:

 

The Conference Board LEI for the U.S. increased slightly in August. This month’s gain was driven by large positive contributions from the yield spread and the ISM® new orders index. In the six-month period ending August 2014, the leading economic index increased 3.9 percent (about an 8.0 percent annual rate), faster than the growth of 2.8 percent (about a 5.6 percent annual rate) during the previous six months. Also, the strengths among the leading indicators have continued to be very widespread.

 

The Conference Board CEI for the U.S., a measure of current economic activity, also improved. The coincident economic index rose 1.4 percent (about a 2.8 percent annual rate) between February and August 2014, slightly faster than the growth of 1.1 percent (about a 2.2 percent annual rate) for the previous six months. The strengths among the coincident indicators have remained very widespread, with all components advancing over the past six months. The lagging economic index continued to increase but at a higher rate than the CEI. As a result, the coincident-to-lagging ratio is down slightly. Meanwhile, real GDP expanded at a 4.2 percent annual rate in the second quarter, after contracting by 2.1 percent (annual rate) in the first quarter of this year.

The leading and coincident indicators are rising, and doing so at a faster pace over the respective latest 6-month period with both are rising on broad-based support.  And the Federal Reserve is clearly in an accommodating mode as evidenced by the dovish tone of the latest Minutes. 

From a US equity perspective, we're really passengers on a global investment train where increasing volatility is caused by events beyond our borders.  But while this is leading to a US sell-off, it's actually a much needed market drop.  US valuations have been high; finding bargains since the first of the year has been a fool's errand.  And the level of investor complacency has needed a shake-up simply to put us back on a more alert footing.   I sincerely doubt the sell-off is over and wouldn't be surprised to see it continue through the end of the year.  But the strong fundamental US economic background indicates this is a time to take some profits and start looking for potential acquisitions that are more fairly priced.


   

 

Weekly Indicators for October 6 - 10 at XE.com

 - by New Deal democrat

My weekly indicator post is up at XE.com.  The data is more mixed than it was during the torrid summer, but I still see no grounds for any immediate concern about the US domestic economy, despite the sturm und drang in the stock market.

Quick Technical Look At The SPYs

Above is a 4 year weekly chart of the SPYs.  There are 10 corrections -- I've circled 3 in blue (I missed the one that occurred at the end of 2011).  There is a trend line that connects the lows of 2011 and 2012.  But there is no contact with that line since. 

The Oil choke collar: is the US on the verge of finally breaking free?

 - by New Deal democrat

I have a new post up at XE.com.

Back in 2011, I wrote that by about now, a combination of alternate fuels, technology, conservation and new exploration might together allow the US to finally break out of the Oil choke collar.

That might be happening.

Off topic: this incident shows why the militarization of police must be reversed

 - by New Deal democrat

Regular economic blogging will resume shortly.  But this article from the Huffington Post really caught my attention.

A 59 year old man who ran a construction company was shot and killed by a Georgia SWAT team that raided his house in the middle of the night.

HIs house had been burglarized a few days or weeks before, and his wife woke him up when she saw men dressed in black approaching their house, believing that the thieves had returned.  The man got his gun. Georgia swears he "aggressively brandished" it at them, justifying their shooting him 15 times and killing him.

Why was a SWAT team raiding his house?  The thief, a meth addict, gave them a bogus story:

The sheriff's office obtained a search warrant based on a tip from a thief who claimed he had found 20 grams of methamphetamine inside a bag he stole from a vehicle at Hooks' home, Georgia station WMAZ reports. According to the warrant, Rodney Garrett claimed that he thought the bag was filled with cash but that he later discovered it contained meth. Garrett said that he then turned himself into the sheriff's office because the drugs made him fear for his safety.

The thief also stole their SUV.

And the result of the raid? --

Authorities searched Hooks' home for 44 hours, but found no drugs, according to the Atlanta Journal-Constitution.

The wife swears they didn't identify themselves as law enforcement. They swear they did.

Here's my question.  The police had zero evidence that the man might be armed and dangerous.  They were searching his house for drugs, not weapons.

So why exactly was a SWAT team necessary?  Why not just regularly serve a warrant?  I have very little doubt that this completely law abiding citizen would still be alive had the police simply followed what once upon a time was normal police procedure.  I have little doubt that a SWAT team was used because the big police boys had their big military toys, and fully intended to use them.

The militarization of US police forces must be stopped.

Three updates on jobs, hours, and wages

 - by New Deal democrat

I wanted to update three series with the jobs data through September:

• 1.  The REAL real unemployment and underemployment rate;
• 2.  A better measure of labor utilization; and
• 3.  Real wages per capita

1.  The REAL real unemployment and underemployment rate.

Although I haven't seen them in a few months (did I manage to kill them?), there used to be a number of analyses that claimed to calculate "the real unemployment rate" by either pretending there was no onslaught of Boomer retirements, or were relying on decade-old Fed estimates.  The idea was that there was some dark pool of "missing workers" who were so discouraged they didn't show up in the monthly report.  This was nonsense, since every single month, the Household Survey includes a measure of those who have given up looking, and so aren't considered part of the labor force, but who still want a job now: series NILFWJN. If we add that to U-3, we get the "real" unemployment rate, and if we add it to U-6 (which includes, among other things, involuntary part time workers), we get the "real" underemployment rate.

The first important note about NILFWJN is that it stopped declining, and in fact has been increasing this year:

It is not a coincidence that this trend reversal happened exactly when the Congress cut off extended unemployment benefits at the end of last year.  About half a million people gave up, and simply stopped looking.

As a result, while the U-3 unemployment rate has declined by -0.8% so far this year (blue), the NILFWJN adjusted unemployment rate has only declined by -0.6% (red):

With that intro, here is the updated REAL unemployment rate (red) compared with U-3:

This currently stands at 9.6%.  Remember to compare apples with apples - this is very similar to where it was at the end of 1994, which was a neither great nor awful jobs environment.

Now, here is the REAL underemployment rate, adding NILFWJN to U-6:

This is currently 15.7%.  Again, very similar to the end of 1994.  It sounds awful, but note that at the peak of the best jobs boom we've had in the last 40 years, in the late 1990's, U-6 plus NILFWJN never got significantly below 10%.

2.  A better measure of labor utilization

Paul Krugman has used the employment to population ratio for the core employment ages of 25-54 as a proxy for slack in the labor market.  This metric avoids conflation by Boomer retirements, and at about 100 million people, is about 2/3's of the entire labor force.  Here's what it looks like now (for some reason the St. Louis FRED doesn't keep this data, so the graph is from the BLS website):

This is up about 2% from its post-recession bottom, but still off 3.5% from its pre-recession peak.

I think there is a better measure.  Instead of looking at the number of jobs in the economy, we look at the number of hours of work in the economy (thus taking care of the part-time worker issue), and divide that by the number of people in the labor force, plus our old friend NILFWJN.  Here's what we get:

We are currently at 94.9% of the number of hours available compared with the peak during the jobs boom of 1999, for those who are either employed or want a job.  This metric has been improving at the rate of about 2% a year.  If that pace continues, we should surpass the 2007 peak in about 9 months, and at least approach the 1999 peak in about 18 months.

3.  Real wages per capita

There is a lot of information about hourly wages.  But what is the average in total wages being made by American workers?  The number of hours worked by the average worker changes significantly over the economic cycle.

To see how much the average American worker is making, we start with aggregate amount of wages  paid (available in the monthly Household Survey), and divide that by population, and then take into account inflation.  This tells us the amount of real wages available to support each person in the population.  Here's the graph, first of the long-term over the last 60 years:

 This very clearly shows how great the 1960's and late 1990's were for wage growth, and the stagnation and even decline from 1974-1995, and again after 2000.

Now, here is a closer view from 1995 to the present:

This gives us qualified good news.  While hourly  wages are still stagnant (bad), the average American is working more hours (good or bad, depending), and thus at the end of the pay period, nearly as much buying power is available for each person as at the 1999 and 2007 peaks (good).  If the present trend continues, per capita real wages should set a new record at some point in the next 3-12 months.

SUMMARY:  We should exceed the 2007 peak in hours and real wages per capita witin the next year. If current trends continue, full employment is probably still about 24-36 months away.

Great minds think alike

 - by New Deal democrat

Prof. Tim Duy looks at the relationship between wages and the unemployment rate, and concludes that this time it isn't different, and in particular, is similar to the recovery in employment and wages after the severe 1982 recession.  The same conclusion I came to.

There is no mysterious dark pool of missing workers distorting the unemployment rate

- by New Deal democrat

As I noted yesterday,  Jared Bernstein recently said in a New York Times column:

So why not just look at the unemployment rate and call it a day? Because special factors in play right now make the jobless rate an inadequate measure of slack....

There are at least two special factors that are distorting the unemployment rate’s signal....

Bernstein's column predictably unleashed another brushfire of  "the unemployment rate is phony" commentary by the usual Doomers.  While I respect Jared Bernstein and generally find his commentary interesting and accurate, in this case I strongly disagree. And I have data in support of my point.

Let me take his two "special features" in order.  He says:

First, there are over seven million involuntary part-time workers, almost 5 percent of the labor force, who want, but can’t find, full-time jobs. That’s still up two percentage points from its pre-recession trough. Importantly, the unemployment rate doesn’t capture this dimension of slack at all — as far as it’s concerned, you’re either working or not. Hours of work don’t come into it.

Every single month for the last 60 years, the Census Bureau has  counted those "who want, but can't find, full-time jobs."  During that time, on 9 occasions the economy has gone through a recession where the unemployment rate exceeded 6%.  Nine separate times, the unemployment rate has thereafter declined to under 6%.

So, let's do a true apples-to-apples comparison.   When the unemployment rate crossed the 6% threshold to the downside, what percent of the civilian labor force "wanted, but couldn't find, full-time jobs?"  That's what the below graph shows.  The unemployment rate is in red, and I've subtracted 6 so that it crosses the black 0 line at 6% unemployment.  The percentage of the civilian labor force that is working part-time, but wants full-time work is in blue.  As of yesterday, that was ~4.55%, so I have subtracted that percentage to place that at zero as well:

In 7 of the 8 prior cases, when the unemployment rate crossed 6%, involuntary part-time employment was about 1% less than it is now.  The 8th time is telling:  following the 1982 recession, which at its trough featured an employment rate even worse than that of the Great Recession, it took until August 1987 for the unemployment to fall to 6%.  That month the percentage of the labor force that were involuntarily working part time jobs was ~4.43%, only 0.1% lower than yesterday's rate.

In other words, what we are seeing now is conquerable to what we saw in the recovery from the severe 1982 recession, and only 1% higher than during recoveries from less severe recessions.  If we use a back-of-the-envelope approximation that part time workers are averaging about 1/2 the number of hours of full time workers, that gives us an increase in the unemployment rate compared with recoveries from more typical recessions of about 0.5%, or a hypothetical 6.4% unemployment rate with a typical mix or full time to part time employees in an apples to apples comparison.

Next, Bernstein says:

The second special factor masking the extent of slack as measured by unemployment has to do with participation in the labor force. Once you give up looking for work, you’re no longer counted in the unemployment rate, so if a bunch of people exit the labor force because of the very slack we’re trying to measure, it artificially lowers unemployment, making a weak labor market look better.

While we only have data going back 20 years, still in every single month since then, the Census Bureau counts those who have entirely stopped looking, and dropped out of the labor force, but want a job now.

In the graph below, I have again subtracted 6 from the unemployment rate, so that it crosses the 0 line at 6%.  Percentage of those who have left the civilian labor force, but still want a job now, compared with the labor force (blue) as of yesterday was about 4%, so I have subtracted that percentage to show it at 0 as of yesterday:

Note that while there are about 0.8% more who fit in this category now compared with 2003, the percentage of those who are so discouraged that they have left the labor force altogether is about 0.5% lower than it was in 1994.   In other words, there is no reason to think this is unusual at all, in an apples to apples comparison with other times of 6% unemployment.

In summary, there is no reason to think that the unemployment rate is underestimating labor slack compared with prior severe recessions, and in is likely only undercounting slack by about 0.5% compared with recoveries from milder recessions.

US Market Review For the Week of September 29-October 3

     Although the uptrend is still in place for both the SPYs and QQQs, weakness in the IWMs, mid-caps and micro-caps is at minimum adding to downside pressure.  Changes in the international risk calculus (see here) are also adding to concerns.   

     From a fundamental perspective, there are few indicators pointing to anything but a continued moderate expansion in the U.S..  Let's start with the long leading indicators.  The worst of the four is building permits which have been moving sideways for about a year.  Corporate earnings dropped in the first quarter largely as a result of a very bad winter, but they rebounded in the 2Q.  M2 Y/Y growth is hovering around 5% and the inverted corporate yield curve is still in an uptrend.  The leading indicators have been in an uptrend for the last 6 months, and all concurrent indicators (industrial production, establishment jobs, income less transfer payments and real manufacturing and trade industry sales) are moving higher.  The total effect of these data points is one of continued growth for the US.

     Also, consider last weeks ISM manufacturing and service sector reports, both of which were solidly positive, especially the anecdotal comments. 

     I asked NDD to add some comments about the market as well; here are his thoughts:

I rarely comment on the stock market from an investor point of view.  Normally I look at it from the point of view of a short leading indicator for the economy.

The selloff this week has been pretty tame - less than 5% of the value of the market.  And while there are a few divergences, I see only one issue qualifying as a genuine yellow flag.

The first divergence is the cumulative advance decline line.  I would expect a significant decline in the a/d line before I would expect to see a major market decline.  In prior recent selloffs, the a/d decline, like the market, moved to higher highs and higher lows.  This time it has established a lower low than the selloff in August:

Still, it's not anything major at this point.

Next, consider bond yields compared with the S&P index.  Since 1998, bond yields and stock prices have typically moved in tandem.  Only when the economy has been strong, as in 2004-05, have yields moved sideways or lower when the market moved higher.  But that is what has happened for nearly all of this year:

The S&P is up about 20% from a year ago, while yields have been generally declining since January. Only briefly during the August selloff, and again this week, have bonds demonstrated a"flight to safety" downturn in yields matching stock rice declines.

Again, a divergence, but hardly an established trend at this point.

Next, I am not seeing a big divergence between insiders and the public.  If I saw insiders selling hand over fist, coupled with a complacent public, I would be more concerned.  As you can see from this graph taken from last saturday's Barron's:

insiders really aren't hoisting a red flag  Again, at least not yet.

Finally, there is one divergence worthy of a yellow flag:  corporate profit growth vs. stock prices. Because corporate profits are a long leading indicator, and stocks a short leading indicator, typically on an averaged quarterly basis, stocks reflect corporate profits.  Here are corporate profits measured by YoY% change (blue) vs. the quarterly average for stock prices, also as a YoY% change (red), for the last 10 years.

Typically stocks follow bonds with a lag of several quarters.

Only twice has that not been the case: in 2006-07 and this year.  Since corporate profits have only been up by about 5% YoY for the last 4 quarters, stocks should follow, but they haven't -- so far.

I fully expect stocks to revert to that mean.  Like 2006-07, there are signs that this might be a blowoff top.  But the same was true 3 and 6 months ago (remember the great margin scare of March 2014?). This last divergence is worthy of a yellow flag.  But that doesn't mean the correction is going to happen right now.

Bonddad Here:

Now, let's start with the charts that are sending warning signals.

The micro caps were trading in a symmetrical triangle pattern for most of the last year.  Prices moved through the lower trend line a few weeks ago on higher volume and are now below the 200 day EMA; momentum is declining and volatility is increasing.  And, once prices broke through support, momentum to the downside increased as indicated by the longer candles. 

The mid-caps were still in a slight uptrend until this week.   But prices have moved through support.  They also dipped below the 200 day EMA before rebounding a bit on Thursday and Friday.  But the last two candles are weak and printed on declining momentum and a weakening price structure. 

And the mega-caps (S&P 100) were not immune either, as they too briefly fell below their long-term trend line.

But on the plus side we have the NASDAQ which is still in very solid technical shape.  Prices are over 5% above the long term trend line.  While the underlying technical indicators are declining, prices would have to fall a fair amount before this average was in any way endangered.  And the fact it didn't drop sharply last week when other indexes were tells us traders are not so concerned as to sell their larger tech positions (at least not yet).

     And, considering that the underlying backdrop is still at least moderately bullish, the number of stocks below their 200 day EMAs is at a bullish level:

     So, let's sum up the basic points from above.  First, the underlying US economic condition is still positive.  No series of economic indicator (long, leading and concurrent) is pointing to a contraction or even recession.  Last week's ISM numbers for both sectors of the economy (manufacturing and service) point to continued expansion.  There are concerns about several other economies, most notably the EU and Japan.  But the core of the US is still solid.  And given its size, it can continue to grow at a moderate pace while other world regions experience a slowdown.
    
     There has been technical degradation of several sub-indexes.  This sell-off was triggered by international concerns and a re-calibration of traders risk calculus.  The charts indicate the sell-off is most likely to continue for at least the coming week, based on the weakening micro and mid-cap indexes.  But several other indicators (stocks below their 200 day EMA) indicate the market is approaching over-sold territory.  And when we place that data point against the fairly decent US economic environment, it's difficult to see the sell-off reaching panic proportions.

 
    






 

   

Weekly Indicators for September 29 - October 3 at XE.com

 - by New Deal democrat

First, the good news:  the Oil choke collar has disengaged to the point where it is already close to its 2011 and 2012 lows.

Now, the bad news:  there was more deceleration this week.