FYI | Jan 28 2011
By BTIG chief market strategist Mike O'Rourke
Thursday is the day when two of our favorite indicators are released: Initial Jobless Claims and AAII Sentiment. Today, they reversed the relationship that has been ongoing for several months. Initial Claims rose and Sentiment backed off from lofty levels. The one-step forward was the drop in AAII Sentiment to 55.1 (Bulls/(Bulls + Bears)), which is back in the heart of neutral territory. It is also the lowest reading in 5 months, since the first week of September. It is not a Buy signal but is a definite step in the right direction. In this environment, Claims are the more important data point so they deserve greater weight, and they are flashing near term risk warnings once again.
.
It is not a surprise that we were disappointed with the spike in Initial Jobless Claims. The Labor Department noted that delayed filings caused by snow in the previous reporting week inflated this week's report. Regardless, two of the past three weeks were poor numbers. The readings over the past 4 weeks have been extremely choppy, making it a challenge to discern the real trend. The weather has been a key factor in the erratic movements. The 4-week moving average representing the trend is now 428,000, up from 411,000 at the end of December. Even if the data continues to disappoint, we are not expecting much of a rise in the trend. Rather, it is beginning to appear that instead of being prepared to break below 400,000 on a consistent basis next month, Claims will continue to bounce around in the 420,000-430,000 range. We believe improvements in this metric are an important ingredient to equity market gains during a recovery. For example, as long as the recovery remains on track, then investors become willing to pay a higher multiple to own stocks, and a weekly indicator is as good as it gets.
.
Once again, the jury will be out until next week to see what trend is emerging in Claims data. While we are not prepared to change our view on the market, defensive behavior over the next week is prudent. The key twist now is that next Friday, the January Employment Situation report will be released. Considering the last two monthly jobs reports missed expectations, if there is a third disappointment, it will likely spark some investor concern. Once again, weather will likely be a factor, fueling additional uncertainty. To be clear, do not count us in the chorus calling for a 10% correction. If there is a correction, we expect it to be shallower than that. Our near-term prudence relates more to avoiding paying up when an opportunity for better prices may arise in the near future. We prefer to save reserves for such an opportunity. Interestingly, if a sell off materializes now that sentiment has started to pull back, we can envision a scenario where a mild 5% correction would likely create an AAII buy signal.
The views expressed are O'Rourke's, not FNArena's (see our disclaimer).
Disclaimer: https://btig.com/disclaimer.php
