Over the weekend I created what I consider to be an absolutely fascinating chart of the unemployment rate going all the way back to February 1st, 1948. I plotted the unemployment rate based on the monthly figures I have going back to 1948. So the chart you will see below is essentially a monthly price chart except that the data is the monthly unemployment rate instead of stock prices.
I have never before seen the monthly unemployment rate plotted along side typical momentum indicators and oscillators. Everyone holds their breath before the monthly unemployment report comes out and counts on it as a major market moving event. But if it was so important then why is it not always viewed in chart form to help better identify unemployment trend, momentum (or lack thereof), and historical context ?
The unemployment rate can be tracked in terms of MACD, Relative Strength and many other indictors just like stock prices can. There are buy signals and sell signals in the unemployment rate and the validity of them is probably more significant than most other charts because we are dealing with monthly data points indicative of longer term trends which are less likely to whipsaw.
If you look carefully at the unemployment rate chart below you can clearly see that the unemployment rate has rocketed higher for certain periods of time since 1948 but every single time it was unable to maintain the spike higher. The spike eventually shifted to changing economic cycles and then the rate of unemployment moderated.
The chart shows clearly that every time the MACD did a bearish crossover and/or the RSI transferred from the ‘power zone’ (above 70) to crossing back under the 70 level, the unemployment rate started to decline. This is shown the bye red dotted vertical lines in the chart.
During the current time frame we can see that once again the MACD has crossed over to the downside and the RSI is coming close to breaking down below the 70 level. This should cause (eventually) the unemployment rate to start showing declines in the months ahead (target next 6 to 12 months).
I have also drawn in some channels (solid blue lines) where the unemployment rate has a tendency to stay within. We seem to be in a similar channel now as compared to that of the 1970s time frame and now appear ready to oscillate back down towards the bottom channel line.
This is precisely what happened during the critical 1975 period which I recently posted on as being very similar structurally.
The first green arrow in the chart above is near the point where the market was in 1975 after it had just completed its 38% retracement. After that the RSI broke below 70 and the unemployment rate started to head down. Before it headed down you can see that the spike higher started to moderate and headed SIDEWAYS. The current 2010 time frame finds us in a very similar situation where the unemployment rate has shifted from a spike up to a sideways momentum. I not expect it to turn down and rocket the market higher.
This chart in my opinion is confirming my bullish forecast for the markets going into end of 2010 and perhaps early 2011.
In my opinion it would be extremely unlikely (although not impossible) for the unemployment rate to now start to rocket higher than then current rate based on this past behavior and momentum shift behavior.
The unemployment rate is definitely a lagging indicator but it does help with some chart interpretation and comparison to past trends. Again I believe this chart supports the my current bullish stance on the market for rest of this year.
Interestingly this unemployment rate chart also supports the case that the gold price has peaked and will now head into a 1 to 2 year decline phase. I would definitely not want to be holding gold with forthcoming declines in the unemployment rate. During the 1975 period the unemployment rate started to decline and gold did a 50% correction.
Eventually the unemployment rate started to get worse again (1977 to 1980) and that rocketed gold to unbelievable heights.
If we continue to repeat the 1970’s scenario then we will see a moderation of the unemployment rate as it falls back down to the channel line and then see it eventually shoot higher again causing the stock market to stumble and gold to rocket to the 3000 to 5000 range.