The One Chart You Must Follow
Don’t read too much into current stock market moves…until you use one simple measurement to gauge stock market valuations.
But first, remember that we just finished the third quarter. This really isn’t much news to provide direction.
There is also a lot of chatter that the market is overbought – and it is.
But, the basic premise is that fundamentals matter.
That is why I believe that Jobless Claims are the best means of measuring the underlying economic growth.
What I do is take the jobless claims y/y and then invert it. Inverting is key: the stock market going up is positive, Jobless Claims going up is negative. Inverting the Jobless Claims makes the moves correlate.
You’ll see the stock market and jobless claims (inverted) are positively correlated.
Jobless claims growth do a fine job of confirming the market’s growth. We don’t want them to match perfectly – because the reality is that the market gets overbought or oversold. So this signal will never be exact.
Instead, we want to spot when the market is overbought or oversold and move accordingly. Because the market always reverts to the level indicated by the Jobless Claims signal.
In other words, after a quantitative easing (QE) boost or a panic (a la North Korea), the market wakes up and moves to the level that makes sense based on the underlying economic growth.
To put it simply – the market is hugely rational over time, but can be hysterical in the near-term. Jobless claims is a significant indicator in where the market is going.