A few days ago, I posted a picture of initial jobless claims on top of the S&P 500 to show you the correlation of jobs and stock prices. You’ll hear from some “pundits” that jobs don’t matter. We’re a service economy now and manufacturing here in the states is never coming back. And while I believe that, my job is to figure out what makes stock prices go up or down. Job growth is one of the many components that affect stock prices. Today, we got another confirmation that jobs do matter. The change in non-farm payrolls figure came out at 7:30 a.m. CST. The number (which will be revised) came out at a -125,000. This was a little better than estimates, but once again this number is going in the wrong direction.
I know it’s hard to believe government numbers and we know they change over time but the point is this: If you believe we’ll have more jobs and a robust economy, you buy stocks. If you believe we’ll have stabilization like we did in the mid 2000s where jobs were created even at a slow pace, you buy stocks. If you think unemployment is going to stay over 10% and increase, then you avoid stocks. This is a longer-term indicator and while things look very bearish based on the above graph, I think we are setting up for a tradable rally in the next few days. As always, we have to monitor the strength to determine whether or not it should be shorted or not. We often get rallies into holidays that are somewhat patriotic. This year, it may be the opposite. I think the rally comes after the holiday.
Short-term (starting in the next few days) – Bullish
Medium-term – Bullish
Long-term – Bearish
Karl,
I had a quick question of something I have noticed over the last 3 days. Despite the market being down, the VIX has also dropped. This is a strange occurrence. Any thoughts??
Clay. That’s a good observation. I think there are some small bullish indicators in the underlying technicals. I think we’re still a day or two away from the bounce. The fact that the vix is falling while market is falling could be construed as bearish in the sense that we want fear to spike because markets tend to rally when that happens. You don’t want investors used to a falling market (hence a falling vix).
If you have less fear (lower $ on VIX) in a falling market, would that signal that most option bets are bearish?
If that is the case wouldn’t that be a contrarian indicator to buy stocks, or calls?
Another thought, the VIX has been a great contrarian indicator, but now everybody watches the VIX, could it be time to start betting against the VIX?
For the most part, it’s like buying the SDS but even more leveraged. If you think the market’s going up, stay away from the Vix and the opposite.