Beware the Bear Market Rally

by: Markos Kaminis

Stocks have moved higher this week, and again Thursday, but for all the lost reasons. Thursday's gain was attributed to a lower number of first-time jobless claims, but truth be told, 454K benefits filers still stinks. Rather, look toward Europe and its stress tests to find what has settled stocks. That said, while European shares should benefit in the near-term, US shares are not priced in panic and should not gain on this regional market reassurance. Rather, US shares are valued for reality, and a harsh reality is materializing. Thus, I view this latest upward activity as a bear market rally.

What kind of nonsense are you buying into? I'm speaking to you investment community. According to the popular press, which is of course usually clueless but occasionally gets lucky, Thursday's gains in stocks were due to weekly jobless claims figures that came in better than the prior week. Come on now! I mean, who have the popular press hired to write this nonsense? You would think it would require a tad more savvy to score a job as a financial reporter versus one covering traffic accidents right? Well then tell me why the popular press thinks 454K new unemployment benefits filers is good news for stocks. Please!

"The market feels her way through, and she tests ideas."

I can tell you why stocks are up ever so slightly this week. Mostly, it's due to technical factors and learned trading wisdom. Stocks had fallen significantly of late, and also over the last two weeks. Thus, there is a sense among investors now that perhaps the bad news is priced in. That sense is reinforced by surfacing strategists who are pointing out just that. The market feels her way through, and she tests ideas. So now she's testing this one out. But there was another important positive bit of information that quick-to-print but slow-to-know journalists missed Thursday. Keep reading...

No Let Up in Layoffs

The fact that the latest Weekly Jobless Claims figure came in at 454K, down from the prior week's count of 475K has nothing to do with share price gains, at least not for savvy investors. Regarding this data point, smart money is now looking at the absolute number of claimants, which has stuck in a depressing state for well too long now. That is evident in the data's four-week moving average, which notes a decline of only 1,250 filers. That's hardly a significant move, and certainly not market-moving. So why the excitement?

"If ever there were a sign of depression, it would be folks giving up on finding a job."

The cheer might have something to do with the two-tenths of a percentage point improvement in the insured unemployment rate, to 3.4% from 3.6%. Continuing claims are declining, true, but these improvements have a lot to do with laborers falling out of the workforce. This was noted in the latest Employment Situation Report as well, and made the improvement in June's unemployment rate suspect (to 9.5% from 9.7%). If ever there were a sign of depression, it would be folks giving up on finding a job.

Meanwhile the government is debating killing the extra support offered by unemployment insurance extensions. This budget-minded maneuver is precisely the same type of error made in the early '30s. However, a friend of The Greek today told me that the unemployed, whose ranks she is included within, have little incentive to take part-time work. Her view was that the loss of sure unemployment benefits is not worth the little income she could earn on a part-time basis. What say you? The Department of Labor today noted that extended benefits were available in Alaska, Connecticut, Kansas, Massachusetts, Michigan, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, North Carolina, Oregon, Puerto Rico, Rhode Island, Vermont, and Washington during the week ending June 19.

Even if Thursday's data were positive, there were far too many extraordinary factors that came to play in the report covering the period ended July 3. First of all, the holiday could skew matters. Also, filings in several states, including the important California, were estimated. But it's not like that data was good anyhow!

The True Driver

What mattered Thursday and is likely playing a role in the stock market gains this week is the news regarding Europe's stress testing of its banks. The deterioration of ISM's Non-manufacturing Index, soft new mortgage writing activity (MBA's Purchase Index down 2.0%), weak retailer chain store sales and still heavy jobless claims certainly did not drive the gains in stocks this week; nor did these factors play a role in the rise of the euro. However, it is very likely that information regarding the European banks helped sure up worries about Europe and the global economy.

ECB Chief Jean-Claude Trichet spent a good portion of his news conference Thursday talking about the importance of the stress tests. Since European policy makers are talking about it, the market found implication in the statements of a future positive outcome. Despite some questions regarding loss assumptions and "haircuts," stocks rallied on Wednesday as well on hope related to the release of information on stress test criteria. This is what has markets settling. Where we go from here though has a lot to do with real economic activity. While European banks could benefit from this result, and perhaps European stocks on the whole, US markets are not trading in panicked fashion now on doomsday forecasts, and should not be saved by reassurances. Therefore, I see these latest gains of bear market caliber and unsustainable in the near-term.

Disclosure: No positions