Understanding Broad Trends Driving Stock Markets

Good to be back in the saddle after of a week of traveling in Silicon Valley, Napa and San Francisco. And I thought New York real estate prices were crazy.

Whenever I am away, I like to ease back into the groove by reviewing some broad market and economic metrics. It isn’t that a lot changes in the day-to-day or even week-to-week numbers — short-term measures are terribly noisy — but rather it’s a good exercise to return to form.

Let’s jump right in:

Breadth: I have discussed the importance of the advance-decline linemany times before (see thisthis and this). The simple fact is breadth remains positive. Lowry Research Corp., a technical market-research service, observed that several of its advance-decline indicators “are all confirming the April market highs.”

From my perspective, I find it extremely helpful to be able to put this into context for those who have a low tolerance for volatility. It also is nice to know where we might be from a cyclical perspective. If you are a long-term asset allocator, willing to ride the ups and downs of volatility, this probably doesn’t mean very much to you. But if you are a trader, this may well mean that there more gains to be had.

Employment: Regular readers know of my disdain for the obsession with this number. It is very noisy and subject to significant revisions. The broad trend is what matters much more than any single month’s data.

Was the weak showing for March a one-off, or was it the beginning of a new, deteriorating trend? We won’t be certain for a while, but Friday’s numbers didn’t suggest a weakening employment pattern. Unemployment fell 0.1 percent to 5.4 percent and wages rose slightly (0.1 percent). The data also show that long-term unemployment – those people who are unemployed for more than 27 weeks — continues to head lower. It is now 29 percent of total unemployment, down from 45.5 percent in April 2010. This, along with little increase in wages, has been the most stubborn negative about nonfarm payrolls.

Continues here What Drives the Stock Market



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