After a strong rally in September and October, the stock market hit its short-term peak four weeks ago, with the Dow falling 4% in just seven days.
In the process, it broke below key short-term support levels being watched by market technicians, and entered a very tight sideways trading range, locked between 11,000 low and 11,200 high, from which no seemed to be able to go in no direction. .
Then came this dizzying week.
At the beginning of the week, it looked like the market might be breaking out of the range to the downside. The Dow Jones fell below 11,000 as much as 70 points in intraday trading on both Monday and Tuesday. Both days it rallied before the market close, 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 further moves by part of the Chinese. government to significantly slow its world-important economy (in an effort to prevent asset bubbles and stave off inflation).
However, on Wednesday the market reversed and surged higher, the Dow gaining 249 points, its biggest one-day gain since Sept. 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 warranted, as the bad news out of Europe and China had faded from the headlines, replaced by very positive economic reports from the US, home sales, etc.
But the drama of the week was not over yet.
The best economic reports in recent months convinced economists that the big report of the week, the Labor Department’s employment report for November, would show that 155,000 new jobs were created in November.
When the long-awaited report was released on Friday morning, it was a huge disappointment as only 39,000 jobs were 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 economists a curveball.
The dire jobs situation, and what to do about it, has been the main focus of economic and political debates, particularly since the temporary scare over 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 shouldn’t 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 the 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, into recessions and back, are almost always housing and cars. 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 the rise in 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. Market concerns earlier in the week regarding Europe’s debt crisis and China’s intention to slow its economy have also not disappeared.
So there are still a lot of potential bumps in the road.
But an encouraging and dramatic two-day bullish reversal from the downside breakout that threatened the first two days of the week.