Initial Jobless Claims Are Still Trending Down, 4-Week Moving Average Above 360,000 Would Be A Warning Sign (12/26/2013)

First, here are quotes from the Department of Labor's press release today:


In the week ending December 21, the advance figure for seasonally adjusted initial claims was 338,000, a decrease of 42,000 from the previous week's revised figure of 380,000. The 4-week moving average was 348,000, an increase of 4,250 from the previous week's revised average of 343,750.

The advance seasonally adjusted insured unemployment rate was 2.2 percent for the week ending December 14, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending December 14 was 2,923,000, an increase of 46,000 from the preceding week's revised level of 2,877,000. The 4-week moving average was 2,836,750, an increase of 39,500 from the preceding week's revised average of 2,797,250.

Keep an eye on initial jobless claims (initial claims for unemployment insurance) and its 4-week moving average because they seem to move inversely with the market (1, 2). They could signal the beginning of the next bear market and economic recession.

False breakout.

The 4-week moving average of initial claims isn't even at its cyclical downtrend yet. But if the 4-week moving average gets close to or above 360,000, it would probably be a warning signal for the market and economy, in my opinion. But of course this would cause the Federal Reserve to ratchet up the monetary base again (QE).

Peter Schiff thinks this as well. Here are quotes from his recent note:

If the economic data begins to disappoint, I believe that Janet Yellen, who is much more likely to be concerned with full employment than with price stability, will quickly reverse course and increase the size of the Fed's monthly purchases. In fact, last week's Fed statement was careful to avoid any commitments to additional tapering in the future, merely saying that further changes will be data dependent. This means that tapering could stall at $75 billion per month, or it could get smaller, or larger. In other words, Yellen's hands could not be any freer. If the additional cuts never materialize as expected, look for the Fed to keep the markets convinced that the QE program is in its final chapters. These "Open Mouth Operations" will likely represent the primary tool in the Fed's arsenal.

Despite the slight decrease in the pace of asset accumulation, I believe that the Fed's balance sheet will continue to swell alarmingly. As the amount of bonds on their books surpasses the $4 trillion threshold, market watchers need to dispel illusions that the Fed will actually shrink its balance sheet, or even halt its growth. Already fears of such moves have pushed up yields on 10-year Treasuries to multi-year highs. Any actual tightening could push them significantly higher.

We have much higher leverage than what would be expected in a healthy economy, and as a result, the gains in stocks, bonds, and real estate are highly susceptible to rate spikes. If yields move much higher, I feel that the Fed will have to intervene to bring them back down. In other words, the Fed will find it much harder to exit QE than it was to enter.

In conclusion, if initial jobless claims break out in the next few months, I think deflationary forces and the Fed will push up Treasury bond prices again (lower yields) and, at the same time, cause market volatility to spike (possibly for a sustained period of time) if strong deflationary forces completely destroy the reflationary effect of QE. It seems like monetary policy has a hard time controlling stock prices at extremes.

On the other hand, if the Fed has to end QE abruptly or even tighten in the near-term because the economy breaks out, they will end up manufacturing a pullback in the stock market and economy.

I don't see how being long stocks makes sense here. Maybe for robots trading multiple times a second.
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