Most people who regularly follow the market have heard the bearish narrative by now…
Especially since it gets louder the more the market seems to climb the wall of worry.
There’s the banking crisis that was supposed to be fully contained… yet isn’t.
The comeback of a grossly overvalued Nasdaq index, currently valued at 25.5 times earnings with a 5.3% revenue growth rate, which is a mind-blowing development considering valuations were at these levels during the peak of 2021.
There’s the lack of market breadth… with gains contained to a small sliver of the biggest names in the index.
And then there’s the razor-thin trading volume supporting current levels…
After the market’s big upside reaction to last Friday’s nonfarm payroll report, the volume on the SPY on Monday and Tuesday was the lowest back-to-back showing since the peak levels of last August… when the market erroneously anticipated a Federal Reserve pivot…
At the time, all you could hear were chants of a new bull market… And the Nasdaq dropped 22% very shortly thereafter…
But the biggest reason the bears are holding firm is the anticipation that the economy is heading toward a recession… which many think is a blind spot for a Fed that keeps publicly praying for a soft landing…
There’s even a case to be made that we’ve witnessed yet another policy error from the Fed, as it should have stopped raising rates as soon as Silicon Valley Bank collapsed… if not reversed course altogether.
The biggest, most common rebuttal to the argument of impending doom and gloom is that the unemployment rate is at 3.5%, which is historically low.
If people are working… They’re spending. I get it…. It’s an obvious yet true argument.
But the only time unemployment was lower was in the early part of the 1950s…
And ominously in 1969… leading into the lost decade of the 1970s when the unemployment rate steadily trended up to hit 10.67% in 1982… a period many economists are comparing the current era to.
To a large extent, this argument is right. As long as unemployment stays around these levels and doesn’t start to reverse higher… The music will still be playing, and the stock market might continue to dance.
But from a market timing perspective… This argument is nearsighted.
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Because before it becomes well publicized that job growth is slowing, jobless claims begin to trend higher, as they did before two of the biggest market fallouts in the last 25 years.
And the trend higher in jobless claims escalated Thursday…
The jobless claims trajectory leading into the 2008 storm looks similar to the current trend… bottoming out months before the market dropped 52.6% after the rally post-Bear Stearns…
Gradually…
Then all at once.
A similar pattern developed around the market peak in 2000…
And on the flip side, once the market crashed in both instances… The bottom also coincided with a reversal of the trend in jobless claims…
When the trend in this indicator reverses, it serves well as a leading indicator. And as it occurs… Emotionally-driven stock prices switch from leading…
To lagging.
Regards,
Eric Shamilov
Analyst, Trading With Larry Benedict