Stocks Extended Relative to Declining Jobless Claims

Year To Year Drop In Jobless Claims Stays On Track at 7.4% But Stocks Are Still Extended In Relation

by Lee Adler, The Wall Street Examiner

The Labor Department reported that seasonally adjusted (SA) first time claims for unemployment fell by 9,000 to 363,000 from a revised 372,000 (previously 369,000) in the advance report for the week ended October 27, 2012. This beat the consensus estimate of 375,000.

Along with the headline seasonally adjusted data, the only data the media reports, the Department of Labor (DOL) reports the not seasonally adjusted data. It said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 339,750 in the week ending October 27, a decrease of 5,476 from the previous week. There were 369,647 initial claims in the comparable week in 2011.” [Added emphasis mine]

Note: The DOL specifically warns that this is an advance number and states that not seasonally adjusted numbers are the actual number of claimants from summed state claims data. The advance number is virtually always adjusted upward the following week because interstate claims from many states are not included in the advance number. The final number is usually 2,000 to 4,000 higher than the advance estimate. I adjust for this in analyzing the data.

Lately the increase between the advance number and the final number the following week has been around 2,500-4,000. Last week it was closer to 2,500 which is what I used this week as the adjustment. The adjusted number that I used in the data calculations is 342,000, rounded. On this basis, the year to year decline in initial claims was approximately 27,000 or 7.4%.

Note: To avoid the confusion inherent in the fictitious SA data, I analyze the actual numbers of claims (NSA). It is a simple matter to extract the trend from the actual data and compare the latest week’s actual performance to the trend, to last year, and to the average performance for the week over the prior 10 years. It’s easy to see graphically whether the trend is accelerating, decelerating, or about the same.

The rate of change was again within the range of weekly fluctuations in the rate of change from -3% to -20% that have occurred since mid 2010. Since mid 2011 the annual rate of change has been within a couple of percent of -10% in most weeks. The trend has been remarkably consistent. Trips outside the range have been rare, and have been due to statistical calendar aberrations rather than any “facts on the ground.”

Initial Unemployment Claims - Click to enlargeInitial Unemployment Claims – Click to enlarge

The SA data has been trending fairly close to the actual NSA data since early October. Prior to that, for most of 2012 the SA data was trending flatter than the NSA data, understating the degree of improvement in the trend. I had called attention to the fact that the seasonally adjusted data was misrepresenting the trend for several months. It has not been unusual over the past couple of years for the SA trend to be wrong. It’s just the nature of the beast.

Note: The following chart is a picture of reality versus the the Impressionist art of seasonal adjustments. Sometimes the SA data represents reality to some degree, and sometimes it doesn’t. If you are following only The SA data, at any given time you have no way of knowing which it is. One thing is certain– it is not photo-realism.

There are ways to measure trends using actual data. One way is to show the year to year line as of the current and corresponding date, as shown on the chart below. Another is to view the annual rate of change as shown in the chart above.

Initial Claims Seasonal Adjustment Off TrackInitial Claims Seasonal Adjustment Off Track – Click to enlarge

As the number of workers eligible for unemployment compensation has trended up since 2009, the percentage of workers filing first time claims has continued to decline. Comparing the yearly line for the current week to the 52 week moving average, the trend of improvement has tracked steadily with rare exceptions. This graph shows a return to the levels of 2004, just before the bubble began to accelerate.

Initial Unemployment Claims Percentage of Total Employed - Click to enlargeInitial Unemployment Claims Percentage of Total Employed – Click to enlarge

Plotted on an inverse scale, the correlation of the trend of claims with the trend of stock prices over the longer term is strong, while allowing for wide intermediate term swings in stock prices. Both trends are largely driven by the Fed’s operations with Primary Dealers (covered weekly in the Professional Edition Fed Report; See also The Conomy Game, a free report). This chart suggests that as long as this trend in claims is intact, the S&P would be overbought at approximately 1450, and oversold at roughly 1200. On that basis it became overbought in mid September. Since then the market has made no progress, but with only a minor correction so far.

I wrote earlier in September that “barring a much stronger improvement in the claims data which would suggest accelerating growth, the market will be at greater risk of a correction in the next few months.” But the Fed may have changed the rules on September 13, by adding more cash to the markets every month and promising to continue to so so until the unemployment rate showed sustained improvement. That will take until a new bubble emerges, spawning new fake jobs, or conversely, until rises in food, energy, and materials costs force the Fed to reverse course. [I cover the technical side of the market in the Professional Edition Daily Market Updates.]

Initial Unemployment Claims and Stock Prices - Click to enlargeInitial Unemployment Claims and Stock Prices- Click to enlarge

For more charts and discussion on this topic visit the permanent Employment Charts page from which this report is excerpted. That page is updated whenever new data becomes available. You can bookmark it for future reference.

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