Unchecked Optimism Keeps Bobbing to the Surface

Just when it seems that the market is getting ready for a return to rationality, unchecked optimism (or, more likely, fear of missing a Big Bull Market) bobs to the surface. It is turning out to be amazingly hard to keep this inner-tube submerged…but just wait until there is a hole in it.

Late in the day yesterday, the headline from Bloomberg said “Stocks rally on oil’s decline.” An editor, perhaps doing some rudimentary fact-checking, noticed that Crude was down a whopping 32 cents and added “…and initial claims drop.” This later changed to the vague “Stocks Rise Most This Year on Economy”, apparently in a concession to the fact that S&P futures had gained 14 of the session’s 24 points before Initial Claims – or any data – had been released.

The ISM Non-Manufacturing Report was as-expected at 59.7, but there is no doubt that Initial Claims was positive as it came in at a multi-year low print of 368k. The volatility continues – or is this genuine improvement?

Economists will seize on this as confirming their null hypothesis (improving trend), and it is sure that it doesn’t disprove it while it nearly disproves my null (that a new lower equilibrium was in force in the low 400s). The only reason these numbers don’t already disprove my hypothesis is that we can’t yet distinguish between trend and volatility because the numbers are jumping around so much. Still, ‘jobs hard to get’ and other employment indicators are improving so it seems more likely that the jumbled mass of economists are right and I’m wrong. The chart of Claims (see below, click to enlarge) certainly suggests a downtrend, but until the last couple of weeks the improvement from 460k to 425k was the only thing that looked reasonably conclusive (after all, in January we still had two prints above 440k) and the “false breakout” in August that ironically helped produce QE2 was what made the trend look optically trend-like prematurely. Imagine that: for a change, humans’ (and even economists’) tendency to try and see patterns in the data actually worked in our favor, rather than leading us astray!

The downtrend isn't as clear statistically as it looks to your eye - but it seems to be real.