Weighing the Week Ahead: Jobs

The upcoming market week will feature a focus on the continuing employment issues.  With the monthly payroll employment situation report on Friday, just before the Labor Day weekend, it is a natural theme.  Expect both politicians and the media to highlight the problems of the sluggish rebound in employment and what might be done to create jobs.

The discouraging job news is closely linked to negative sentiment about the economy and the prospects for economically sensitive stocks.  These continue to be key topics for both investors and traders.

Before looking ahead, let’s do our regular review of events.  It is easier to look ahead when you have a good perspective on where you are.

Background on “Weighing the Week Ahead”

There are many good services that do a complete list of every event
for the upcoming week, so that is not my mission.  Instead, I try to
single out what will be most important in the coming week.  If I am
correct, my theme for the week is what  we will be watching on TV and
reading in the mainstream media.  It is a focus on what I think is
important for my trading and client portfolios.

Last Week’s Data

With earnings season ending market participants are pouncing on every bit of information about the economy, even when the importance is marginal.  Last week’s news was mixed, with plenty of room for interpretation.

The Good

The very best news of the week is ironic and contrarian.  It concerns sentiment.  Perceptions have gotten so negative that many see the signs of a rebound for stocks.  This was the big news of the week and the real reason for Friday’s rebound.

• The single best, one-stop summary of the sentiment story is Friday screencast: panic rarely pays, from Abnormal Returns.  These screencasts are an enjoyable addition to the regular daily links we have all come to rely upon.  The video presentation allows curator Tadas Viskanta to provide a little more color in his commentary.  (And of course, we are always honored to be included.)
• The highlights include historically low levels of bullishness in investor surveys, Mark Hulbert’s own index of newsletter writers, now net short (in the aggregate), and a New York Times article that reminds many of the famous 1979 Business Week cover.

Fed Chair Bernanke used his widely-anticipated speech at the annual Jackson Hole gathering to describe more about potential future Fed policies and emphasize vigilance about deflation concerns.  This did not seem like fresh news to many, but some saw it as clarifying the conflicting signals from individual Fed members.

Truck fuel usage in the US and Canada is rebounding sharply.  Todd Sullivan highlights the strong relationship between these data and employment.

Rail volumes were also strong, with new highs in intermodal transport.

The Bad

Initial jobless claims were reported as 473K.  While this was an improvement over the 5-handle figure of the prior week, we cannot expect improvement in employment with so many new job losses.

Q210 GDP was revised to an annualized gain of 1.6% from the originally reported 2.4%.  Much of the revision was due to higher imports, a widely-misunderstood interaction with GDP.  (read here to learn more). Check out the Bonddad Blog for good news about consumption and other “hidden positives” from this report.

The Ugly

Housing was bad — very bad.  Everyone anticipated weak sales numbers in the aftermath of the tax credit expiration.  The actual numbers were even worse.  Since inventory is calculated in months using current annualized sales rates, these numbers also look terrible.

Calculated Risk covers the data as well as providing great analysis of this important story.

The Week Ahead

It could be an exciting week.  The big news will come with Friday’s employment situation report, especially coming right before Labor Day weekend.  Leading up to that report will be forecasts from ADP and other sources.  I’ll do our own regular employment preview on Wednesday, including data from the ISM manufacturing report.

Many people will be slipping in a vacation during summer’s last week, so trading volumes will be low.  Moves could well be exaggerated.

Despite the policy elaboration from Bernanke’s Jackson Hole speech, some will look to the release of the FOMC minutes (Tuesday) for more information on internal Fed debate.  I do not expect any fresh news from that source, since the topic was thoroughly examined last week.

There will be housing data and
more information on jobless claims, but the focus will still be
political.  We are in the dog days of summer.  Many will be on vacation
and the political debate will still command attention in business
stories.

Our Own Forecast

Our own indicators shifted to neutral last week.  We are
cautious, with many sectors in the penalty box.  This is a recognition
that we cannot make a solid short-term prediction.  When a sector is in the penalty box,
we know that forecasting future moves will be challenging.  As a
result our vote was neutral in the weekly Ticker Sense Blogger Sentiment Poll.   Here is what we see compared to two weeks ago:

•  84% of our 55 ETF’s have a positive rating, down from 96% last week.
• 100% of our 55 sectors are in our “penalty box,” similar to recent weeks.  This means that uncertainty remains high for short-term trading.
• Our universe has a median strength of +18, down from +33 last week.

For trading accounts, we have been mostly out of the market during the last week.

[For more on the penalty box see this article.
For more on the system ratings, you can write to etf at newarc dot com
for our free report package or to be added to the (free) weekly email
list.  You can also write personally to me with questions or comments,
and I’ll do my best to answer.]

Investment Implications

The continuing volatility has makes this a difficult time for trading accounts.  Some wise observers see opportunity.  Doug Kass, in a thoughtful overview of many factors, including valuation, economic fundamentals, sentiment, and others — draws this conclusion:

It is time to fade the growing negative consensus and adopt a variant view by becoming more constructive on stocks.

Others emphasize the long-term opportunity.  The Schwab economic team reviews a wide range of economic data and concludes that fears exaggerate the reality.  Their article, worth reading in its entirety, echoes many of the themes I have emphasized this summer.