Stock Market Analysis

Thursday, October 04, 2007

Investors Eagerly Awaits Employment Report

The Dow ended sideways today as investors eagerly await tomorrow's employment report. The employment report is truly the economic indicator of all economic indicators; The ONE Economic Indicator. This is also the economic indicator most closely monitored by the Feds in concocting their fed fund rate policy. Indeed, the employment report is so highly anticipated that the Job report and factory orders report today hardly matter. The employment report, or also known as the Employment Situation Report or the Uemployment Rate report, is the most direct indication of USA economic well-being. As the saying goes, what matters is the bottomline. The bottomline of every economies are happy, employed citizens who are contributing to the economy! Nothing else matter when the end result doesn't please. That is why this report has such significance, even though it is released every first Friday of the month (versus Mondays for the ISM index). So, what are we looking for in the Employment Situation report? Like all economic indicators, we are looking for a reading which supports investor's expectations. So, what are investors expecting? Investors are expecting data that increases the possibility of another rate cut! :) Which means that the employment report tomorrow should show a slightly higher than expected unemployment but not enough to cause widespread panic about a pending recession. This is a tricky balance which is difficult to predict. That makes for all the uncertainty in the market. Indeed, without uncertainty, there will be no efficient or liquid market and every other day will be boom or bust, making it impossible to invest in. The pricing in of another rate cut has obviously begun and would definitely magnifest as a nice bull run tomorrow if the employment report turns in "favorable". From the data so far... initial claims beating and raising the 4 months average and factory orders declining, employment report cannot be expected to turn in rosy.

The Dow ended it's 2 days fall in an almost neutral day today. These 3 day's corrective action has allowed the Dow to get off the short term overbought region by a slight margin, increasing the possibility that we will see more upside to come. The low of 1 Oct, which I identified yesterday as a critical short term bottomline, continues to hold up safely. In fact, the 1 Oct low of 13893 is as important as the bottom of a baby cradle now! Break the bottom and be ready for a painful fall. Volume was low today as investors await tomorrow's data. A completely neutral day with very low volume is indeed as good as a market holiday. The Dow however continue to look slightly over extended as it trades high above its 30MA on a weekly scale. In fact, the Dow rarely trades more than 10% higher than its weekly 30MA before a significant pullback (this, surprisingly, conforms to the mean/variance theory). Currently, it is about halfway there. This is certainly not the best of times to put on new positions.

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