Binary Market Analysis For February 1st 2013
This rally is still on and it’s being lead by labor. Over the last half of 2012 labor market improvements were the major driver of the U.S. equities markets. The improving scene, as shown by a drop in unemployment between July 2012 and November 2012, gave rise to hopes the consumer was back and that corporate earnings would increase. Many pundits speculated that the third quarter of 2012 was an earnings trough for U.S. corporations and so far the signs are pointing to yes. More than 60% of the 500 companies that make up the S&P 500 Index have surprised analyst by beating EPS estimates in the fourth quarter of 2012. They have increases revenues by 3.5% and earnings by an average 4.8%. Today’s releases of non-farm payrolls data and January unemployment rate were well within expectations and reassured the markets that the underlying fundamentals of the economy haven’t changed.
Non-farm payrolls number were a little confusing. There were some major revisions to November and December, mostly due to annual readjustment of the benchmark numbers, that make the fourth quarter jobs market look a lot better than it did before. The problem is that these figures are subject to wild revisions and since the gains also occurred during a readjustment period there is even more reason to doubt their importance. Looking back over the last year I can that there was a similar spike in jobs creation last winter and that it was bigger than the one we have now. What we should be looking at is the recent rise in unemployment and the signs that it could continue to rise in the next month or two. Many economist expected the unemployment rate to remain steady or even drop, the rate in January actually gained. This is the second month of unexpected gains in the unemployment rate.
This is why. First, there has been no real change in the number of jobs being created in the U.S. The figures are wildly volatile but have remained in a range for over a year. Sometimes we get new jobs and sometimes we lose them; this is probably due to seasonality changes in retail, services and other sectors that occur from year to year. Second, the number of Americans that file for first time claims of unemployment has also remained stable. Over the last year the rate has remained in the range of 350,000-400,000, not counting one dip below and one peak above. This range represents some expansion in the labor market but just barely. And this is taking into considering that the participation rate has remained steady over the last three months. The participation rate is also only down 0.1% from last January and is a sign of a stable labor force. So, If the total number of Americans filing for unemployment is on the rise then the unemployment rate should also rise. Looking at the table below it seems like we can expect the unemployment rate to continue to rise.
My take on unemployment is that it will help the market, and the S&P 500, to rise in the nearer terms. Longer term there is reason to doubt the improvements and suspect a rise in unemployment could be on the way.
What this means for U.S. and world markets? Since the labor market is not really improving and we can expect it to remain as is for a while we can also expect the Fed to continue with its $85 billion asset purchase programs. Their target rate of 6.5% unemployment is one that we won’t reach this year. This will be good for international currencies like the Euro and the Yen. Both of these currencies have broken above resistance and are moving up toward there next targets. Either pair looks good for monthly and weekly call options on intra-day or day-to-day pullbacks. As for the major U.S. and world indexes, I think labor will provide significant resistance to equities market longer term.
Eur/USD Binary Option Analysis
S&P 500 Binary Analysis 2/1/2013
The S&P made a nice move up this morning. The index crossed over to a new intr-day five year high and the Dow crossed the 14,000. Short term the index looks ready to continue its push to retest the all time highs around 1565. There may be some more consolidation around the current level but it looks good for monthly calls. When the index breaks above the 1510 level I will look for potential entries for weekly calls.
The jobs data is OK, basically unchanged,and fiscal policy is not expected to change in the short term. The next hurdles for the markets to overcome is the dismal future guidance we are getting from corporations this earnings season. Corporate expectations are for tough times ahead, this could be a sign of poor first quarter earnings. There is also the whole debt ceiling and sequester issue to consider. Both of those could be a cap to future price gains but are also still weeks, if not months, away. These political events could have a lot of impact on labor trends as well. All three issues could coincide with the S&P 500 retesting all time highs. This is a very key resistance point and one that will bear close watching.
The long term trend is still up. The trend is weakening and faces a lot of resistance ahead. We need to see a marked improvement in long term labor trends. We need to see a resolution to the spending sequester. We need to see business outlook improve. Until these things happen I think the S&P will be halted at or just above the all-time highs. Until then trade with care.