VIX and More

Nary a selloff goes by these days without at least a handful of readers asking for an update of the SPX pullback table I have used to chronicle the pullbacks in the S&P 500 index since stocks bottomed in March 2009.

The table below captures the 24 most significant peak-to-trough declines from new highs during the course of what is now an almost five-year bull move:

[source(s): Yahoo, VIX and More]

Note that the current peak-to-trough decline of 6.0% puts the pullback in the middle (#11 of 24) of those pullbacks in terms of magnitude, though it is slightly lower than the 6.9% average (mean) pullback during the period, due to large selloffs in 2010 and 2011 that skew the average well above the median.

While the recent decline seems sharp, it actually progressed in two stages: a sideways to slightly down move for the latter half of January; and a sharper decline at the end of January and the beginning of February. If one were to plot the magnitude of the current pullback against the duration of the peak-to-trough move, it would like exactly on the trend line which can be found on the plot in All About the Pullback from 1687. In other words, the current pullback, should it stop at SPX 1739, is very middling in almost all respects.

That being said, a mean pullback of 6.9% would take the SPX down to 1723 and a pullback matching the 21.6% decline from 2011 would take the SPX all the way back to 1451 – a level not seen since early January 2013.

Right now the SPX is at 1757 and has about a 1% buffer over yesterday’s low. While emerging markets are bouncing back nicely today, anything can happen following the release of Friday’s nonfarm payroll data.

Related posts:

• All About the Pullback from 1687

Disclosure(s): none

Four months ago, in The Economic Data Cliff, I discussed the rapidly deteriorating economic data relative to expectations and noted the sudden strong divergence between economic data and the stock market

At the time I offered two potential explanations:

“Perhaps stocks are decoupled from reality and are merely postponing the inevitable decline, but there also exists the possibility that stock prices are beginning to reflect the possibility an economic turnaround at the end of the year or in early 2013.”

With the benefit of four months of hindsight, the relationship between economic data and the stock market is no less murky. After being tightly correlated for 2 ½ years, stocks and economic data have been moving in almost the exact opposite direction since the beginning of June, no doubt partly due to the intervention of central banks across the globe.

What I find particularly interesting in the graphic below, however, is that just as the trend in economic data relative to expectations began diverging from stocks in June, the two began converging again when economic data began to show signs of improvement about a month ago.

Of course none of this will come as a surprise to those investors who saw today’s promising nonfarm payrolls report as an excuse to buy some stocks this morning. For now at least, stocks and the economy continue to move in opposite directions – whether that means up or down for stocks.

[Readers who are interested in more information on the component data included in this graphic and the methodology used are encouraged to check out the links below. For those seeking more details on the specific economic data releases which are part of my aggregate data calculations, check out Chart of the Week: The Year in Economic Data (2010).]

Related posts:

• The Economic Data Cliff
• Worst Post-2009 Week in Economic Data Relative to Expectations
• Stocks and Economic Data on Upswing Despite Disappointing Manufacturing and Housing Numbers
• Economic Data vs. Expectations: Stocks and Employment Data Rallying Since October
• Economic Data: Divergence or Confirmation for Stocks?
• Aggregate View of U.S. Data vs. Expectations
• How Good Has the U.S. Data Been Lately?
• Economic Data Not Supporting Gloom and Doom Forecasts – At Least for Now
• Economic Data Relative to Expectations and Stock Prices
• Continued Lackluster Data vs. Expectations
• Economic Data Frozen Until Next Thursday
• More Upticks in Economic Data vs. Expectations
• Economic Data Trends Improving
• Chart of the Week: Updated Economic Data Trends
• Economic Data Trends in Advance of Nonfarm Payrolls
• Trends in Economic Data Relative to Expectations

[source(s): various]

Disclosure(s): none

In case you missed it earlier this morning, after a nonfarm payrolls report that indicated 120,000 jobs were created in March, approximately 80,000 short of consensus expectations, equity futures fell approximately 1.4%, with the E-mini S&P 500 futures (/ES, shown in graph below) falling to 1372 – a level not seen since March 13^th.

Coming on the heels of three days of declines, another 1.4% move down would bring the peak to trough pullback to about 3.5%, which represents half of the 7.0% median pullback we have witnessed since stocks bottomed in 2009. [See Putting the Current 2.6% SPX Pullback in Recent Historical Context for additional details.]

Investors who have benefitted from the 32% gain in the S&P 500 index since the beginning of October are no doubt going to be quick to protect profits in an environment where the consensus is that stocks are long overdue for a pullback. What we have lacked until recently has been a catalyst for that selloff. Tuesday’s FOMC minutes, in which the Fed seemed to be much less inclined to move in the direction of QE3 or other stimulus measures seemed to catalyze sellers. Today’s nonfarm payrolls data provided another catalyst, but it may not be as powerful as some expect. Initial jobless claims continue to trend down and suggest an employment market that is flat or improving, which raises the possibility that the March nonfarm payrolls were a statistical outlier and/or will look stronger in light of future revisions to today’s data.

Perhaps most important, however, weakness in employment is exactly the issue that will cause the Fed to rethink the likelihood of further stimulus measures, up to and including QE3. At the very least, today’s nonfarm payrolls undermines concerns about the growing hawkish stance evident in Tuesday’s FOMC minutes from the March 13^th (there is that date again) meeting. Whether it is current out-of-the-money or at-the-money, the looming presence of a Bernanke put should not be overlooked.

Related posts:

• Putting the Current 2.6% SPX Pullback in Recent Historical Context
• Economic Data: Divergence or Confirmation for Stocks?
• Dynamic VIX ETPs as Long-Term Hedges
• Comparing SPLV and VQT
• Three New Risk Control ETFs from Direxion
• The Case for VQT
• The Year in Safe Havens
• The VIX as a Hedging Tool
• Why Not Point Hedges?
• The Dangers of Anticipating a Market Reversal

[source: thinkorswim/TD Ameritrade]

Disclosure(s): none

The last time I checked in on the performance of U.S. economic data relative to expectations, some two months or so ago, I observed:

“One could certainly make the case that data underperformed stocks from April to September, but has been outperforming stocks for the last 2 ½ months.

While conventional wisdom says that stocks lead economic fundamentals for 6-9 months, this graphic does not support that idea. Instead, it will be interesting to see which of the two assumes a leading role now that at least some of the European angst appears to be in the rear view mirror.”

With the benefit of hindsight, clearly the stocks have been in the driver’s seat and to some extent, the increase in stock prices has had a positive effect on the economic data. For the better part of January, there was a substantial divergence (see dotted red box in graphic below) between stocks and economic data, with stocks in a marked uptrend, while economic data were falling short of consensus expectations on a regular basis.

It is possible that last week’s nonfarm payroll data and ISM services index marked a turning point in the performance of economic data relative to expectations, yet it is also clear that the data trend still lags the stock price trend by a significant margin.

For this update, I have annotated the graphic with arrows to show where manufacturing and employment have been the economic underpinnings of a rise in stocks. This time around the employment data seem to be moving in the right direction, but manufacturing has had trouble living up to expectations – at least for the past two months.

[Readers who are interested in more information on the component data included in this graphic and the methodology used are encouraged to check out the links below. For those seeking more details on the specific economic data releases which are part of my aggregate data calculations, check out Chart of the Week: The Year in Economic Data (2010).]

Related posts:

• Aggregate View of U.S. Data vs. Expectations
• How Good Has the U.S. Data Been Lately?
• Economic Data Not Supporting Gloom and Doom Forecasts – At Least for Now
• Economic Data Relative to Expectations and Stock Prices
• Continued Lackluster Data vs. Expectations
• Economic Data Frozen Until Next Thursday
• More Upticks in Economic Data vs. Expectations
• Economic Data Trends Improving
• Chart of the Week: Updated Economic Data Trends
• Economic Data Trends in Advance of Nonfarm Payrolls
• Trends in Economic Data Relative to Expectations

[sources: various]

Disclosure(s): none

Today’s data dump of nonfarm payrolls, the ISM non-manufacturing survey and factory orders caps a big week for economic data and since there is an unusually long stretch until the next data points are released ( next Thursday’s jobless claims), this seems like a good time to update my ongoing chart of economic data relative to expectations.

The last time I updated this chart, in late October, I observed, “There has been a noticeable uptick in positive reports since the beginning of September – one that just so happens to coincide with the upturn in stocks.” Today’s nonfarm payrolls report notwithstanding, the pattern of positive surprises has been repeated through November and into the first week of December. While employment continues to be the biggest story, the recent uptrend in the consumer and resurgence in manufacturing mitigates some of the bad news on the labor front and hints at the possibility of a job market that may show signs of improvement soon.

The other big story in this chart is that as bad as housing and the construction market seem, the data has consistently been coming in higher than the lowered consensus expectations.

Finally, it is rare that there is dearth of data in the U.S. for such an extended period of time. Among other things, this lack of new data points means that any investing trends that are currently in place will have little in the way of evidence to undermine their validity during the next week. It also means that the Fed will have little in the way of additional new information in front of them when the FOMC meets on Tuesday, December 14^th.

Related posts:

• More Upticks in Economic Data vs. Expectations
• Economic Data Trends Improving
• Chart of the Week: Updated Economic Data Trends
• Economic Data Trends in Advance of Nonfarm Payrolls
• Trends in Economic Data Relative to Expectations
  

First unveiled on July 2^nd in Trends in Economic Data Relative to Expectations, I was pleasantly surprised by the positive reception to my chart of how various components of economic activity have been tracking against expectations for 2010. As a result, I expect to periodically update a version of this chart for the blog.

This week’s chart of the week is one such update, selected partly because the last several weeks suggest a possible reversal in the negative trend of economic data relative to expectations for employment and the consumer (Retail Sales, Consumer Confidence, Consumer Sentiment, Personal Income, Personal Spending, etc.)

While there is some evidence that the downtrend in economic data may have been broken, there is at best marginal evidence to support the idea of a bullish uptrend in the data. Starting tomorrow with the retail sales numbers, this week should go a long way toward answering some of the questions about what the data say about the state of economic activity in the United States.

Related posts:

• Economic Data Trends in Advance of Nonfarm Payrolls
• Trends in Economic Data Relative to Expectations
• Fundamentals and the Recovery
• Chart of the Week: A Broader Look at the U.S. Economic Recovery
• Chart of the Week: Four Key Economic Indicators

Any week the employment report is on the schedule, the big story is likely to be the nonfarm payrolls and this week was no exception.

While the census employment cycle has lately skewed the headline number, the private payroll data, hours worked and average hourly earnings indicate that there are continued signs of improvement, small though they may be.

The chart of the week graphic below tracks the headline net monthly nonfarm payroll change (blue and red columns) as well as the unemployment rate (red and black line) going back to 1999.

It is worth observing that even without the fluctuations caused by the census employment situation, it is not unusual for the net payroll changes to see a significant degree of monthly noise in the short term and/or exhibit some pattern of starts and stops over the longer term as the economy lurches forward into a more coherent recovery mode.

Finally, it is important to note that in order for the employment situation to cease being a drag on the economy, merely breaking even on payrolls from month to month is not enough. Most estimates indicate that 100,000 – 125,000 new jobs need to be created each month just to accommodate the demographics of a growing labor force.

For more on related subjects, readers are encouraged to check out:

• Nonfarm Payrolls and Backsliding
• Chart of the Week: Updated Nonfarm Payrolls and Unemployment Rate
• Chart of the Week: Nonfarm Payrolls, Unemployment Rates and Time
• Chart of the Week: Putting Nonfarm Payrolls in Context
• Nonfarm Payrolls Before and After Recessions
• Chart of the Week: Economists Try to Predict Payroll Losses

Disclosure(s): none

Concern about the employment situation have resulted in considerable churning – both in the financial markets and in the minds of investors – about the various labor market data. The recent nonfarm payrolls report raised more questions than it answered and the weekly jobless claims numbers often suffer from a low signal to noise ratio that makes it dangerous to get too excited about one week of data.

In an effort to put the nonfarm payrolls data into some historical perspective, last week I assembled Chart of the Week: Nonfarm Payrolls and Backsliding to highlight the nonlinear aspect of much of this monthly data. Rather than wait until the end of this week, I thought it might be helpful to do something similar for the initial and continuing jobless claims data.

The chart below captures the jobless claims data going back to 1967. Since these are absolute numbers, it is important to note that the current universe of workers covered by unemployment insurance is almost three times as large as it was in 1967. Still, the trends have a great deal of informational value. Note, for instance, that the data are on two axes and the initial jobless claims (solid red line) seems to have settled into a holding pattern that is near the highs from the 1990-91 and 2001-03 recessionary periods.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: Nonfarm Payrolls and Backsliding
• Nonfarm Payrolls Before and After Recessions
• Chart of the Week: Updated Nonfarm Payrolls and Unemployment Rate
• Chart of the Week: Nonfarm Payrolls, Unemployment Rates and Time
• Chart of the Week: Putting Nonfarm Payrolls in Context
• Chart of the Week: Continuing Jobless Claims

Disclosure(s): none

Before the long weekend, I thought I would post a chart I use in which I track the performance of key economic data releases relative to consensus expectations.

The data are sorted into five groups and include economic reports such as the ones highlighted below:

• Manufacturing/General – GDP, ISM, Industrial Production, Capacity Utilization, Durable Goods, Factory Orders, Regional Fed Indices, Productivity, etc.
• Housing/Construction – Building Permits, Housing Starts, Existing Home Sales, New Home Sales, Pending Home Sales, S&P/Case-Shiller Home Prices, Construction Spending, etc.
• Employment – Employment Report, Jobless Claims, etc.
• Consumer – Retail Sales, Consumer Confidence, Consumer Sentiment, Personal Income, Personal Spending, etc.
• Prices/Inflation – Producer Price Index, Consumer Price Index, etc.

For each report, I evaluate whether the data exceeds or falls short of consensus expectations. I then aggregate the data over time to see the extent to which certain segments of the economy are trending higher or lower relative to expectations.

The chart below summarizes the trends in these five categories since the beginning of the year. In terms of performance relative to expectations, manufacturing (solid black line) has performed best, though the trend has turned down for the last two months or so. Not surprisingly, the worst performing area – by a considerable margin – has been employment (solid red line), where the trend relative to expectations has been consistently negative since the middle of April.

For more on related subjects, readers are encouraged to check out:

• Nonfarm Payrolls and Backsliding
• Fundamentals and the Recovery

This morning’s nonfarm payrolls report confirms that the job creation portion of the economy which was strong in March through May has turned negative again, resulting in a net loss of 125,000 jobs in June. On the positive side, the private sector added 83,000 jobs during the month, while the loss of 225,000 temporary census workers was the sole reason for the negative headline number.

There were, however, some ominous signs in the nonfarm payroll data. These included a decline in the average hourly workweek (down 0.1 to 34.1 hours) as well as a decline of $0.02 in average hourly earnings to $22.53.

In addition to capturing the last 11 ½ years of payroll (blue and red columns) and unemployment rate (red and black line) data, the chart below is intended to highlight the perils of overreacting to the last data point. Note that particularly in the early stages of a recovery (i.e., the red box covering June 2002 – August 2003), the data tend to be choppy and any trends short-lived. I expect that the same dynamics are at work in the current environment. Employment is not the only area of concern at the moment. Housing is also suffering from some backsliding this month, as pull forward demand triggered by the government tax incentives is now giving way to several months of slow residual demand.

I am still anticipating a slow growth scenario for the balance of 2010, with economic expansion – and the accompanying data – moving forward in a fashion that will probably resemble the path taken by someone trying to drive a manual transmission vehicle for the first time.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: Updated Nonfarm Payrolls and Unemployment Rate
• Chart of the Week: Nonfarm Payrolls, Unemployment Rates and Time
• Chart of the Week: Putting Nonfarm Payrolls in Context
• Nonfarm Payrolls Before and After Recessions
• Chart of the Week: Economists Try to Predict Payroll Losses

Disclosure(s): none

Any week that the employment report is released, that data is automatically in the running for the chart of the week. Given that the Bureau of Labor Statistics corrected some of the historical data series and stocks rallied sharply off of the not-as-bad-as-feared payroll losses, this seemed like a good time to update a chart that has always been a big hit and I that I have not published in seven months.

The chart below shows monthly changes in nonfarm payroll employment and the unemployment rate going back to 1999 and captures the recent plateau in both measures. Note that in 2002 and early 2003, payroll data showed an occasional positive blip before sustained payroll growth began in the last quarter of 2003. Also worth noting, the unemployment rate did not peak in 2003 until 20 months after peak payroll losses that dated all the way back to October 2001.

Of course every recovery is different, but from a labor perspective, one can still make the case that there is not enough evidence that the employment situation has bottomed.

• Nonfarm Payrolls Before and After Recessions
• Chart of the Week: Putting Nonfarm Payrolls in Context
• Chart of the Week: Nonfarm Payrolls, Unemployment Rates and Time
• Chart of the Week: A Broader Look at the U.S. Recovery

Disclosure(s): none

I was pleased to see that Sunday’s Chart of the Week: A Broader Look at the U.S. Recovery generated a good deal of interest and discussion. While I have always been a card carrying Quadropheniac, truth be told the only slice of the economy anyone is obsessing about these days is jobs. So with the weekly jobless claims numbers due out tomorrow and the February nonfarm payrolls slated for a week from Friday, this seems like an opportune time to revisit the employment situation.

Since last Sunday’s chart measured nonfarm payrolls from 12 months prior to 27 months following the preceding business cycle peak, I have elected to take a much longer view of employment and recessions. The two charts below show employment trend data for five (top) and ten (bottom) years before and after each business cycle since 1948.

Note that in the years leading up to the December 2007 business cycle peak, job growth was relatively flat compared to the historical mean (blue line). More importantly, the performance during the current ‘recovery’ is not only anemic compared to prior post-recession job creation efforts, there is still no concrete evidence of a bottom in employment. The current economic environment is in stark contrast to prior recessions, where there economy has typically replaced all the jobs lost in the downturn at this stage and was already in a net positive job situation relative to the prior business cycle peak.

While I still anticipate that job growth will begin in the next few months, the longer this jobless recovery persists, the harder it will be to get the economy firing on all cylinders.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: Nonfarm Payrolls, Unemployment Rates and Time
• Chart of the Week: A Broader Look at the U.S. Recovery
• Chart of the Week: Four Key Economic Indicators
• Chart of the Week: Retail Sales Recovering

For the sake of the economy and the national psyche, I was just as happy as the next person to hear that Friday’s nonfarm payrolls were better not as bad as had been expected.

The 247,000 jobs lost in July were the lowest since August 2008 and less than half of the job losses suffered in each month from November through April.

I last highlighted nonfarm payrolls in a chart of the week just over two months ago: Chart of the Week: Nonfarm Payrolls, Unemployment Rates and Time. In that post and accompanying chart, I stressed that following the peak job losses of 325,000 in October 2001, it was 19 months before there was a sustained improvement in the unemployment rate and a full 3 ½ years before the unemployment rate was below the October 2001 rate on a sustained basis.

This week’s chart of the week adds two more months of data to the previous chart and highlights another important point about the monthly job report. In the last recession, it was two full years from peak job losses to three months of consecutive net job gains. Further, while the 247,000 job losses sounds like considerable progress in the context of the recent job situation, July would have been the third worst month for job losses during the 2000-2003 bear market.

So while the July employment numbers are undoubtedly a step in the right direction, we are a long way from the type of data that should be a cause for celebration.

[source: Bureau of Labor Statistics]

As much as I enjoy technical analysis and sentiment charts, it is time the chart of the week addressed one of the many fundamental macroeconomic issues currently being debated.

This week’s chart combines two important jobs numbers from Friday’s employment report: monthly changes in nonfarm payroll employment and the unemployment rate. In some respects, this week’s data seemed to be conflicting, as the nonfarm payrolls were not as bad as expected, yet the unemployment rate was worse than anticipated. Part of the reason for this is that data is derived from two different sources. The nonfarm payrolls are the result of a survey of businesses, while the unemployment rate number is calculated on the basis of a survey of households.

[Without straying too far from the subject at hand, I want to highlight an often overlooked component of the nonfarm payroll that is known as the so-called birth/death model. This statistical construct added 220,000 jobs to the survey results, with the majority of these ‘birth/death’ additions coming from the construction, hospitality and leisure segments. I have some skepticism about the birth/death model adjustments to the May data, but will leave that subject for another post. In the meantime, those who are interested in learning more about what I am referencing may wish to review:

• Current Employment Statistics Net Birth/Death Model
• Current Employment Statistics Net Birth/Death Model Frequently Asked Questions
• Impact of Business Births and Deaths in the Payroll Survey
• Accounting for Business Births and Deaths in Current Employment Statistics
• Technical Information: Estimation Methods for Business Births and Deaths]

The chart below dates back to 1999 and captures the full history of the 2000-2003 economic slowdown and bear market. Note that the peak monthly decline in nonfarm payrolls (dotted black line) was a loss of 325,000 jobs in October 2001. The shaded gray area highlights the subsequent 19 months in which job losses decreased, yet the unemployment rate jumped from 5.3% to 6.3% during this period in what was known as a jobless recovery. As the chart shows, it was a full 3 ½ years before the unemployment rate was able to drop below and remain below the 5.3% level (dotted red line) of October 2001. Worse yet, even the substantial improvement in the May 2009 data puts job losses at a level higher than the 2002-2003 peak. Simply stated, the job situation is not improving, but the rate of deterioration has slowed.

I have no reason to believe that the recovery from current recession will be any faster than the recovery from the last recession. If anything, the arguments for a longer deeper recession seem compelling. Even if we have the same type of jobs recovery that we had the last time around, however, investors may want to think in terms of 3-4 years or perhaps more before unemployment recedes to the 7.6% level from the peak January job losses of 741,000.

[source: Bureau of Labor Statistics]

The word of the year may be bailout, but when it comes to the stock market, the operative word for this week is resiliency.

On Tuesday, Wednesday and again on Friday, stocks shrugged off bad news and sharp declines to post solid gains. Yesterday’s feat was perhaps the most impressive of all, after November nonfarm payrolls shocked even the most pessimistic estimates by falling 533,000. Following the release of the employment data, the Dow Jones Industrial Average was down 292 points (3.5%), before putting on a furious 638 point (7.9%) rally and eventually ending the day with a 259 point gain, up 3.1% from Thursday’s close.

This week's chart of the week captures the payroll predictions of the 73 economists surveyed by Bloomberg prior to the release of the employment report. The actual nonfarm payroll number of -533,000 is more than four standard deviations away from the mean prediction and is indicated by the dotted black line to the right. Given that this result triggered a 3.1% rally, one wonders what might have happened to stocks if the employment data had been near the median prediction of a 333,000 loss or perhaps even the more optimistic projections of a loss in the vicinity of 220,000.

Going forward, economic data releases are on the light side until the end of next week, but watching how stocks react to the news flow next week may go a long way toward determining the character of the recent buying activity.