Jobless Claims Market Reaction: There Was None

Markets move based on numerous technical and cyclical reasons. Trying to apply news to market news is a fools errand, reports Avi Gilburt.

On Thursday March 26, we saw the worst jobless claims number in history, and by a wide margin. It doubled the following Thursday. Yet, the S&P 500 futures rallied more than 200 points from their overnight lows last week and were up again yesterday. So, are we to believe that the “cause” of that rally was the jobless claims?

If the market dropped 200 points, there would be no question in your mind that the drop was certainly caused by the jobless claim’s announcement. It is likely that most market observers’ expectation was for the market going to be down big when those numbers were announced.

So, in the interest of intellectual honesty, should we not view the 200+ point market rally on March 26, which began immediately after the claim’s announcement, as being caused by the jobless claim’s news? That would be the logical conclusion. How can you even doubt that if you would have believed a market drop of 200 points was caused by this report?

Consider why the market drop scenario would have been so certain to you whereas the market rally scenario makes you stop and think. The move occurred right after the announcement, so why would you question it? Isn’t that how the market works?

If you consider these questions in an honest manner, you may be on your way to enlightenment about our financial markets. Some will ignore the facts, begin to engage in mental gymnastics, and claim that the market rallied because it expected worse numbers, or try to come up with some other reason. While some analysts may spin this, there is no reasonable explanation as to why the stock market would rally more than 200 points on the worst jobs report we have ever seen, especially with most people expecting the next one to be even worse, which it was.

The simple conclusion is that the substance of a news event is completely meaningless to the direction of the market. Either you believe what your eyes are telling you, or you will put on blinders. Remember, the S&P500 ended down almost 100 points after Congress finally passed the stimulus bill.

The main problem is an assumption that the market will act reasonably. Markets are not driven based upon reason. Rather, they are driven based upon emotion. And, trying to ascertain the direction of an emotional market using reason is a fool’s errand.

News simply provides us an excuse for a move in the market, which was already set up to happen, whereas the substance of that news is not going to always be predictive as to the direction of the market move. And, when there is no news, pundits struggle to find a reason.

If you were paying attention to the volatile movers over the last month —both down and up — you would conclude that there is no rhyme or reason between expectations and news events.

Over the years, I have cited many independent social experiments and historical analysis which prove that news is not the driving force in markets, despite the common fallacious expectations to the contrary, but mothing illustrates this better than the price action during the Coronavirus pandemic.

In a 1988 study conducted by Cutler, Poterba, and Summers entitled “What Moves Stock Prices,” they reviewed stock market price action after major economic or political news events in order to develop a model to predict market moves.

The study concluded: “[m]acroeconomic news . . . explains only about one fifth of the movements in stock market prices.”

In fact, they even noted: “many of the largest market movements in recent years have occurred on days when there were no major news events.” They also concluded that “there is surprisingly small effect [from] big news [of] political developments . . . and international events.” They also suggest that:
The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases casts doubt on the view that stock price movements are fully explicable by news. . .

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years’ worth of “surprise” news events and the stock market’s corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

In a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets:

Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness.

In 1997, the Europhysics Letters published a study conducted by Caldarelli, Marsili and Zhang, in which subjects simulated trading currencies, however, there were no exogenous factors that were involved in potentially affecting the trading pattern. Their specific goal was to observe financial market psychology “in the absence of external factors.”

One of the noted findings was that the trading behavior of the participants were “very similar to that observed in the real economy,“ wherein the price distributions were based on Phi.

At some point, you must begin to recognize that markets are driven by market sentiment. And, the parameters that the market is providing to us right now based upon our sentiment analysis suggests that as long as the S&P 500 remain below 2725, we can expect a lower low before the next major bull market move begins. But, the larger degree structures still suggest that the SPX can be heading to the 4000 region in the coming three years. I have seen nothing yet to suggest otherwise.

For those that have been following my analysis for the last several years, you would know that I was pounding the table to the long side in early 2016, calling for a global melt up. You would also know that in late 2018, I raised cash when the S&P 500 broke below the 2900 region, and then outlined an iShares 20+ Year Treasury Bond ETF (TLT) long trade in November of 2018. Those that followed me had a tremendous opportunity to earn 30%+ in the TLT trade I outlined back in late 2018, and then cashed it in.

When the market broke out above 3040 in late 2019 and into early 2020, I was very cautious about being long the equity market until the market proved its ability to hold support on the pullback. Clearly, it did not.

So, as many analysts and investors may be telling you that you need to prepare for this “bear market,” I am suggesting that you should keep an open mind for the resumption of the bull market move. In fact, our StockWaves analysts provided our members with a list of stocks, with many of them rallying 20-45% over this past week.

So, consider putting together your shopping list over the coming weeks, as the market is having a fire sale. And, until I see something within the market structure to make me think otherwise, this is going to be my plan over the coming weeks and months. Ultimately, it will take a sustained break in the S&P below 1990 to make me reconsider my larger degree expectations, with 2060 being my ideal level of support for one more bout of weakness. The market has drawn the lines in the sand.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.