Trading Nonfarm Payroll Charts

I usually write about the technical conditions of the financial markets.

Sometimes, though, it's a good idea to apply technical concepts to economic and financial indicators, such as the monthly nonfarm payroll data.

Frankly, last week's number surprised me with its weakness, so I started experimenting with a few ideas over the weekend to try to gain an understanding of the significance of the latest data, and I came up with a really interesting relationship.

We technicians assume that markets move in trends and that once a trend begins, it remains in force until enough indicators prove that it has reversed.

Trends, of course, can range from intraday trends to secular trends extending over several decades. Obviously it's not possible to apply intraday analysis to economic data, because most of this information is published on a monthly basis.

To monitor these cycles in nonfarm payrolls, I decided to divide each monthly data point by a 12-month moving average. The great thing about a 12-month average is that it eliminates any seasonal biases. The result is the indicator plotted at the bottom of the first chart.

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When the oscillator is above zero, nonfarm payrolls are above the average and so forth. The tipping point appears to develop when the oscillator falls below the dashed horizontal line at +0.5%. Since 1955, every time it has fallen below this level, the economy has either been in or just about to enter a recession. Previous recessionary periods are flagged with the red highlights. Last Friday's number put it right at the line. Will it go through? The second chart says yes.

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This one compares the trend of temporary help with the nonfarm number. The arrows show that since this indicator was first published in the early 1990s, it has led every major turn in the nonfarm payrolls. The rationale is fairly obvious. Employers who are hesitant to hire new people start them off on a temporary basis, and when conditions improve, they can justify employing them on a full-time basis.

When conditions worsen, employees are first placed on a temporary basis before being let go. That leading indicator is still declining. The first chart also shows that short-term interest rates fall pretty sharply following the tipping point signal.

The third chart shows that the manufacturing sector, as reflected in the rate of capacity utilization, falls like a stone, but what does all of this mean for the stock market?

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The fourth chart tells us that following five of the eight previous signals, the market bottomed within a few weeks. In 1957 it had one more down leg, but you can see from the first chart that the signal was followed by one final uptick in short-term rates, so it's not surprising that the market declined.

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The two other exceptions developed in 1981 and 2001. Between September 1981 and August 1982, the S&P declined, but early cycle leaders such as consumer finance and utilities did very well. The maximum number of stocks hitting new lows also took place in September 1981, so while the S&P and Dow declined, there were quite a few places to make money. The second early signal took place in 2001. Following that, the NYSE A/D Line actually advanced, so while the tech-burdened S&P was falling, the broad market as reflected in the A/D line was fine.

A couple of weeks ago, I wrote about the bearish sentiment and huge expansion in the number of NYSE stocks reaching new 52-week lows as a bullish sign. In essence, we saw a classic selling climax. I also suggested that a test of the lows was probably in order.

I still think that in terms of stocks hitting new lows, we have seen the bottom. However, the major averages, such as the S&P Composite, could well record a new low. After all, years ending in "7" tend to have the worst performance of the decade, and September/October is often a crisis period.

Even so, I believe that the next major move will be up, not down, and that if we see another decline, it will represent a great buying opportunity.

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At the time of publication, Pring had no positions in securities mentioned, although holdings can change at any time.

Martin J. Pring is president of pring.com, and is actively involved in Pring Turner Capital Group, a money management firm. He also publishes the monthly market letter "Intermarket Review." Pring is the author of several books, including Technical Analysis Explained, and numerous educational, interactive CDs. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Pring appreciates your feedback; click here to send him an email.

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