October 7, 2012
Weekly Market Outlook
By Geoff Bysshe
On Friday the Labor Department reported that the unemployment rate unexpectedly fell to 7.8%. This is just in time for the President to be able to say that unemployment is at the lowest rate since he took office in January of 2009. I'm sure the President was smiling, but interestingly, the market did not seem to be all that surprised or excited by the good news.
Stocks got off to a good start on the better than expected employment news, but by the end of the day, the response was less than enthusiastic. I won't go so far as to say Friday was a "good news bad action" day, but there are a few indicators and price points that you should be paying attention to as warnings of a nervous market.
The chart below is one measure of how confident traders and investors are based on what kinds of stocks they're buying. The top of the chart is the S&P 500 as represented by the SPY ETF. The bottom of the chart is the indicator.
The arrows on the chart illustrate how an upward trend in the indicator tends to indicate a bearish environment for stocks, while a down trend in the indicator tends to support an uptrend in the general market. This has held true in 3 of the 4 periods illustrated here. The dashed arrows indicate a period where stocks rose despite the upward bias in the indicator.
Also note the orange lines highlighting how at significant market turns you can see classic divergence patterns. In this week's video you'll see more history on this indicator, but the key take away from this chart for traders right now is that the indicator has turned up. It's time to watch out for a divergence or an acceleration of the indicators up trend over the next several weeks. If markets pull back again along with this indicator moving higher the down move will likely be significant.
For more on what to look out for in the coming week watch this week's Market Outlook Video.
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