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Government vs. Market Participants
Late last week, the Department of Labor announced that 353,000 individuals were hired. The announcement was credited with a sharp increase in US stock market indices, followed by surges in some other countries. The validity of this information was not confirmed by other data sources. The household survey showed only 170,000 people being hired, less than half the 353,000 reported by the Department of Labor. (Many professional economists in the private sector prefer to use the “household survey”. The main difference is the Labor Department uses the number of individuals receiving compensation, whereas the household survey counts the number of the people working. Under current economic conditions, the number of people with second or third jobs has been growing, resulting in a significant difference between the two sources.)
Whatever the reason for the difference, media pundits and left-leaning politicians issued encouraging statements suggesting the so-called single cause of inflation – jobs – reversing and a new bull market in stocks beginning.
The problem with this assertion is that for the week both New York Stock Exchange (NYSE) and NASDAQ market participants sold more shares than they bought and more stock prices declining than rising. There are two other statistical surveys which also cast doubt on the pundits’ conclusion.
Before the Depression, there were a few market analysts who believed new price trends should be confirmed before they are believed. A decision rule was formed requiring a trend be confirmed by a further price movement of at least 3%. (I have not seen a current measurement study, but the market expansion could require an increase of even more than 3%.)
One of the market’s wise tales is that the “public” is always wrong. Numerous studies have shown that on average this is quite wrong. However, the public are often wrong in staying too long with a trend. Depending on which market indicator is utilized, the US market has been rising since late 2021 or early 2022. One could say the trend is long enough and it could be due for a reversal.
I tend to use the Standard & Poor’s 500 (S&P 500) as my single measurement device. It recently reached a new high of 4844. Applying the 3% rule, a close above 4989 is needed to confirm a new bull market. I am convinced it will happen, but possibly not now.
The best measure of public trends is currently the weekly sample survey produced by the American Association of Individual Investors (AAII). The survey tracks the bullish, bearish, or neutral expectations of investors for the next 6 months. The statistical “norm” for each of the 3 choices is in the range of 30%, with an extreme reading being 50%. Professionals believe an extreme reading can’t be maintained for too long a period before it is marked down. Analysts use these readings as contrarian indicators.
I have slightly refined the 3% rule and suggest a reading be rated extreme when the highest-performing observation is 2 times that of the second-highest. Guess what! The latest bullish reading is 49.1%, with the bearish reading at 24.5%. Bottom line, I am dubious a new bull market has begun. I prefer to wait until both the election and chairs of the various critical congressional committees are identified.
Question: Will you share what measures you use to identify bull and bear markets?
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
