Unemployment is a coincident indicator of the stock market. Coincident indicators move along with the general price trend. Leading indicators help to predict the future direction of the trend. New unemployment claims, for example, are a leading indicator of the stock market.
New claims can be volatile from week to week, and a four-week moving average is often used to smooth the data. The four-week moving average of new claims has fallen to its lowest level since October 2007. A decline in new claims is usually bullish for stocks.
Another leading economic indicator, the new order component of the ISM Manufacturing Survey, is also bullish. This indicator ranges from 0 to 100, but most readings are between 40 and 70. Values below 50 for several consecutive months are usually seen before an economic contraction and a stock market dip. The most recent value of the new order index is 63.2, well above 50 and bullish for stocks.
The relationship of this indicator to the stock market is shown in the next chart. The 12-month rate of change (ROC) for new orders and the S&P 500 index have moved in the same general direction for many years.
In addition to these two leading indicators, I follow a model that uses input from seven different economic indicators and that is also bullish.
Stocks can turn down at any time, but we generally see the economy turn down first. With leading economic indicators in bullish territory, there is no reason to expect a bear market. Any weakness in the stock market should be viewed by long-term investors as a buying opportunity for now. For the short-term, I am comfortable with a small position in inverse ETFs like ProShares Short S&P500 (ETF) (NYSEARCA:SH) as a hedge against a short-term pullback.
When the economic indicators deteriorate, I will become bearish.
Gold Posts Small Loss as Talk of Military Action Picks Up
The lack of a rally is especially surprising given that gold is now more oversold than it has been at any time since 1999. The next chart highlights that period of time, when gold was building a multi-year base before beginning the extended bull market that ended in 2011. Oversold is being defined as a negative or low value of Bollinger PercentB, an indicator that defines where prices are relative to the Bollinger Bands.
Volatility, measured with the Bollinger Bandwidth indicator and shown in the center of the chart, is high. This indicator tends to move in cycles between high and low values. At this point, it is likely that volatility will fall. This would indicate that gold should be expected to remain within a relatively narrow trading range.
Gold seems to offer little upside in the short term and traders can find better opportunities in other markets.
This Week’s News
It should be a quiet week in the markets as traders wait for the Fed meeting that begins on Sept. 17.
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