Has Unemployment Peaked?

 |  Includes: DIA, QQEW, SPY
by: Babak

Everyone is trying to come to terms with the surprise nonfarm payroll figures from last week. One camp, lead by TrimTabs, believes they are completely fabricated by the BLS while others tend to mostly believe it.

From a technical analysis point of view, it isn’t necessary to get into an argument about the validity of the data. Instead, what matters much more is how the market reacts to it.

The day of the announcement, the S&P 500 index pushed into a new high for the year, intraday, but ultimately closed slightly higher. This printed an upside down candlestick which indicates weakness. Still, not much has changed. We are still mired in the trading month long range or flag formation at the 1100 area and the larger rising wedge formation has yet to resolve itself:

S&P 500 rising wedge flag update Dec 2009

In recent history (past decade), the equity market has declined following a positive surprise from the nonfarm payroll figures. And while we are heading into the end of year seasonality boost, we’re not there yet. In fact, short term seasonality at this time of December is rather negative.

In any case, unemployment probably has not peaked yet. But that does not mean that it will draw a straight line up. While every one was surprised by Friday’s release, this was the 8th time that unemployment monthly data went down since October 2006.

According to David Rosenberg, there are quite a few reasons to expect more ‘good’ news in the short term:

  1. A skew from the seasonal adjustment factors caused by the massive losses from November 2008 to May 2009.
  2. Obama hiring 1.5 million people during Q1 to conduct the census (it will last into April).
  3. We are about to see the President announce a slate of job creation measures including tax credits for new hiring and additional infrastructure spending as well as more financial aid to state and local governments.
  4. Based on what the automakers are saying, we should be seeing a 10% sequential rise in motor vehicle production in the first quarter as well.
  5. The November employment report showed there to be upward revisions, a hefty gain in temp agency employment and a healthy increase in the workweek — all leading indicators and the first time we have seen such a trio in three years.