After a strong rally in September and October, the stock market hit its short-term high four weeks ago, and the Dow fell 4% in just seven days.
In the process, it broke below the key near-term support levels that market technicians are watching, and entered a very tight sideways trading range, locked between 11,000 down and 11,200 up, of which no seemed to be able to get out in any direction. .
Then came this heady week.
At the start of the week, it looked as if the market may be range-bound to the downside. The Dow fell below 11,000 as much as 70 points in intraday trading on both Monday and Tuesday. Both days it rallied before the market closed, but to levels slightly above 11,000, leaving traders still concerned.
A breakout of the range to the downside would be seen as a negative development, and that possibility seemed warranted given dire reports from Europe that a domino effect is potentially underway in its debt crisis, and reports from China of more moves down. part of the Chinese government to significantly slow down its world-class economy (in an effort to prevent asset bubbles and avoid inflation).
However, on Wednesday as the market reversed and rose, the Dow gained 249 points, its biggest one-day gain since September 1. On Thursday it rose again, the Dow gained another 106 points, clearly breaking it from the previous one. narrow trading range to the upside, just two days after it appeared to be breaking down.
The dramatic move higher also seemed justified, as bad news from Europe and China had disappeared from the headlines, replaced by very positive economic reports from the US, home sales etc.
But the week’s drama was not over yet.
Better economic reports in recent months convinced economists that the big report of the week, the Labor Department’s November jobs report, would show 155,000 new jobs added in November.
When the long-awaited report was released on Friday morning, it was a huge disappointment, with only 39,000 jobs created in November. The economy needs roughly 150,000 new jobs a month just to keep up with the growing population, as more young people join the workforce.
Perhaps a bigger surprise and disappointment was that the already high unemployment rate rose to 9.8% from 9.6% previously.
The report threw a curveball at economists.
The dire employment situation, and what to do about it, has been the main focus of economic and political debates, particularly since the temporary scare in the summer that the economy might be slipping back into recession. One of the most common statements in those debates has been that the economy cannot recover until more jobs are created. And on the surface that seems to make sense.
However, history shows that employment is a lagging indicator, one of the last areas to start to improve in an economic recovery. And that makes more sense. Employers don’t start hiring additional workers until long after the economy has recovered enough that they can no longer handle business improvement simply by increasing the hours of their current employees and hiring temporary workers.
So the dismal jobs report should not overshadow the string of very positive economic reports in recent months; increases in consumer confidence, manufacturing activity, retail sales, auto sales, pending home sales, etc. They are leading indicators that need to improve for quite some time before employment finally starts to turn around.
Not that everything is wonderful in those main areas. Investing is never worry-free.
The main leading indicators in both directions, towards recessions and backwards, are almost always housing and automobiles. That makes sense since they are the two largest purchases consumers make, typically with the majority of the purchase price financed, significantly multiplying the economic effect of the cash down payment, while increasing home construction and automobile production results in significant new business for the long stream of suppliers to those industries.
Only one of those economic engines, car sales, appears to be doing well so far, with the housing industry still mired in mud. The market’s concerns earlier in the week regarding Europe’s debt crisis and China’s intention to slow down its economy have not gone away either.
So there are still a lot of potential bumps in the road.
But an encouraging and dramatic two-day bullish reversal from the breakout that threatened the first two days of the week.