Is Current Stock Market Sentiment A Contrarian Indicator?

Heading into the jobless claims report from the week of December 8th, some investors were wondering if the claims were turning higher which would signal the end of this cycle. They had bottomed at 202,000 in September and reached 231,000 in the week of December 1st. That’s not a huge turn, but investors like to anticipate the weakness in order to profit. Claims are volatile and such a small percentage change could easily be noise.

Also, we showed how the non-seasonally adjusted claims had relative strength in a previous article. There are a lot of seasonal adjustments around holidays like Thanksgiving. One way to avoid mistaking a signal for noise is determining if there is a one time event which affected claims. There wasn’t one which pushed them higher, but the seasonal adjustment could be blamed partially.

The latest jobless claims report switched the narrative from wondering about a potential recession, to wondering if the metric will hit a new cycle low. The previous week’s report was revised to 233,000. The latest report fell to 206,000 which is just 4,000 above the September low. This beat estimates for 228,000 and the low end of the expected range which was 225,000. There weren’t any one-time factors once again.

This was an unusual report. As you can see from the chart below, the 27,000 weekly decline in initial claims was the largest since the week of April 25th, 2015 when it fell 28,000.

(Click on image to enlarge)

Initial Claims Crater

Source: FRED

This report can easily be revised higher and it might be a blip which is quickly reversed. The only thing we know for certain is we know nothing. The increase in the prior few weeks wasn’t enough to base a bearish thesis around yet and this report doesn’t mean the economy is about to accelerate.

Is The Labor Market Full?

The record low jobless claims in relation to the size of the labor market suggests the labor market is full. That and the lowest unemployment rate since December 1969 support the Fed’s rate hikes. However, not every indicator agrees with that analysis. In a previous article we reviewed the prime age employment to population ratio which doesn’t signal the labor market is full.

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