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The Crisis in Europe has Occupied Wall Street and dominated the headlines for most of 2011. As the year draws to a close many investors have been forced to the sidelines unwilling to step into the uncertainty that lies ahead. Despite these concerns U.S. markets have managed to crawl back from their summer lows with most major indices going green on the year.

True believers in the rally are few and far between with most professionals using terms like “Cautiously Optimistic,” “Dead Cat Bounce” and “DEFCON 3.” As investors and students of the market we all look for indicators that have some predictive value to help us discern market direction; the endless quest for the “Holy Grail.”

For the last couple of years strategists have pointed out that employment gains will be the best indicator that our markets are headed higher. Month after month on the first Friday we are glued to our screens living or dying on the next jobs number. Understandably the country and most investors are focused on the unemployed and how fast they will return to the workforce. However, much of the unemployment in the United States is structural. Millions of jobs across a wide range of industries have been lost and may never come back.

The United States has been exporting manufacturing jobs to the third world for decades. With the ability to ramp up production in any corner of the world big multi-national companies have taken their manufacturing off-shore and will continue to do so as long as it helps the bottom line. Almost every industry has found a way to increase margins by tapping into this cheaper global workforce.

Perhaps We are Ignoring the Elephant in the Room

Jobless claims come out every Thursday morning like clockwork and give us a good indication of how many have been recently fired. Look at the chart below.


(Click to enlarge)

Jobless Claims vs. SPX (Bloomberg Chart Tool)

The S&P 500 bottomed in March 2009 and shortly after jobless claims peaked. As claims fell the market marched higher until early this year. Claims spiked again in April and the market topped out shortly after. Then of course Europe started to melt down dragging the rest of the world with it.

Notice again in recent months jobless claims have started to fall and our market has managed to claw its way back. For the last five years there has been a strong inverse correlation between these two sets of data. If this trend continues we can expect a continued bid for our markets. Of course on its own this is just one indicator and if used should be part of a host of research tools to form your investment thesis.

The S&P 500 bottomed in March 2009 and shortly after jobless claims peaked. As claims fell the market marched higher until early this year. Claims spiked again in April and the market topped out shortly after. Then of course Europe started to melt down dragging the rest of the world with it.

Notice again in recent months jobless claims have started to fall and our market has managed to claw its way back. For the last five years there has been a strong inverse correlation between these two sets of data. If this trend continues we can expect a continued bid for our markets. Of course on its own this is just one indicator and if used should be part of a host of research tools to form your investment thesis.

3 More Reasons to Stay Long

Market Pundits are Bearish – Every day I have to watch a parade of talking heads tell me the crisis in Europe is the end of the world.

Corporate Profits are Strong – Look at chart from Federal Reserve Bank of St. Louis

Fred Corporate Profits
(Click to enlarge)

Source Federal Reserve Bank of St. Louis

Economy is Still Expanding – Yes we are flying close to stall speed but we are still in the air.

I admit the Global Macro picture isn’t pretty and if that is all I had to look at I would be sitting in a cave somewhere in Pennsylvania counting the canned goods and ammunition I had stored for the Apocalypse. However, in the end owning a stock gives you the right to participate in the earnings and or dividends of a company. Right now that looks pretty good when compared to treasuries and CD’s.

I am calling for the S&P to take out the May 2011 high sometime in the first quarter. For now that’s as far as my crystal ball can see. I am certain there will be days I’ll wish I didn’t make this call but there it is. As for the indicators I share above; they are just some of the tools I use to form my bullish thesis. Of course none of them are the “Holy Grail” but I am sure we will all keep on looking.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Market Outlook 2012: Seeking The Holy Grail