The Most Reliable Stock Market Indicator You'll Ever Find

 |  Includes: SPY
by: Lou Basenese

Yesterday, I smashed every investor's go-to crystal ball -- corporate insiders -- into a thousand little pieces. As it turns out, they can't predict the market's next move, particularly downturns, with any more consistency "than the gizzard squeezers could tell the Roman emperors when the Huns would attack," as Peter Lynch liked to say.

Apparently, telling you to avoid using such an unreliable indicator wasn't enough, though. As one reader, Tim H., wrote in: "That's all good and well, Lou, that insiders stink as a leading indicator. But what do you suggest we use instead? Or are you one of those guys that just likes to point out problems without providing any solutions?"

Ask and ye shall receive, my friend.

Say Hello to the Most Reliable Leading Indicator: Jobless Claims

For almost six months now, I've been telling you that an uncanny inverse correlation exists between initial jobless claims and stocks. As claims go down, stocks go up (and vice versa). And thankfully, claims have mostly been going down. The good news is that the passage of time -- which often undermines the reliability of any indicator -- has only cemented this one's trustworthiness.

Take a look:

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What's more, the correlation has been especially strong most recently. Case in point: Jobless claims are down about 10% this year. Last week, they hit their lowest level in five years. And lo and behold, the S&P 500 Index is up almost the exact same amount (9.4%) over the same period. Of course, as I've noted before, correlation doesn't always imply causation. In this case, though, it most certainly does.

Initial jobless claims applications serve as a proxy for layoffs. And the less companies are laying off employees, the more optimistic they are about their future. The data backs me up here, too. Since November, applications dropped about 13%, pointing to an uptick in labor conditions. And sure enough, since that time, net hiring has picked up to an average of 200,000 jobs per month, compared to about 150,000 per month before November.

Add it all up, and "improved levels of jobless claims could be the most important economic indicator in the market today," according Bespoke Investment Group. And I couldn't agree more. The lower jobless claims go, the higher we should expect stocks to rise.

Of course, at some point, claims won't be able to go much lower. After all, a certain level of jobless claims applications is to be expected, even in a robust economy. But don't fret about that just yet. Based on history, the bottom rests at about 300,000 claims -- or about 10% below current levels.

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Bottom line: I challenge you to find a more reliable stock market indicator during this bull market than initial jobless claims. So track it! Bespoke publishes an update to this indicator periodically on its website, But it's just as easy for us to do it on our own.

All we need to do is dump the data into a spreadsheet and chart it. You can find the historical jobless claims data here. (Be sure to use the seasonally adjusted numbers.) And you can find the historical price information for the S&P 500 on any major financial website, including Yahoo Finance here.

How does that solution work for you, Tim H.?