Charting Economic Data with Market Trends

By Bryan McCormick

I have mentioned many times that economic indicators can move markets, a fact that can be obvious on the date of the release. But in many cases we can miss the bigger picture because of their slow time frame--often once a week or less--and this pace can sometimes render their impact invisible.

Today I wanted to look at a simple method that can help us see the bigger trend and understand why traders are looking for confirmation, or divergence, in current economic releases.

First we are looking at initial jobless claims (red line), which were reported today, and the S&P 500 (green line). Since the initial claims number is only available on a weekly basis, we are viewing them on a weekly time frame, and only for 2009.

We are also looking at a four-week moving average of both the initial claims and the S&P 500 to smoothe out any "noise" in the data.

What we want to see -- and what many professional traders are looking for--is the trend, not just the individual numbers. Those new releases of course will help determine if a trend remains intact, accelerates, or decelerates. I have also mapped this to percentage changes so that the two series can be compared more easily.

It is quite apparent that the four-week trend in claims peaked just about when the S&P 500 troughed. That is something we might not have seen if we were not looking at a smoothed graph of the data. Since that peak, there have been a few ripples in the initial claims, which is noisier than the S&P itself, that are also reflected in the S&P price line but to a much smaller degree.

It is not an exact shape-to-shape match we are looking for, but rather confirmation that the S&P rises as the number of claims declines. This is a rough visual index of co-movement, in this case inverted. When -- or if -- that stops happening, we may perhaps know that the indicator is no longer one that reflects the key concern of traders.

Right now, employment is the one big element of recovery that in absolute aggregate numbers has gone in the wrong direction. The claims numbers trend, however, suggests that traders are looking ahead to a time when their steadily declining rate catches up and is reflected as better employment news.

Remember that markets are a discounting mechanism, often looking at least six to nine months into the future.

(Chart data provided by Thomson Reuters)

Comments

[pslater:]

Great analysis! This graph reminds me of John Murphy's book 'Intermarket Technical Analysis'.

Nov 12 05:49 PM

[GreenMom:]

VERY interesting!

When we see state and municipal payrolls shed a million jobs on top of other layoffs, please update these graphs, so we can see if the inverse correlation holds. The lines should start moving towards each other again.

seekingalpha.com/artic...

Nov 12 11:40 PM

[mbkelly75:]

I love stuff like this. Good work !!! I agree with GreenMom - I am very interested in seeing if the inverse correlation holds true.

Nov 13 12:14 AM

[dingding:]

Perhaps the relationship holds because traders use the jobless claims figure as an excuse to move the market?

Nov 13 01:13 AM

[David Van K...:]

The initial jobless claims number is one of the widely reviled "green shoots" that are thought by many to be meaningless, or worse, just a pack of lies. The graph in this article clearly shows that they haven't been meaningless...you could hardly have a clearer (inverse) correlation.

Nov 13 02:41 PM