This Early Warning Sign Shows That All Is Not Well

Stocks can rally on bad news, or they can fall on good news. The news isn’t as important as how it compares to expectations.

On Friday, the employment report for September will be released. This report often moves the stock market. On average, daily volatility is three times more than normal.

But not all employment report days see large moves. The big days tend to follow unexpectedly good or bad data.

Stocks can rally on bad news, or they can fall on good news. The news isn’t as important as how it compares to expectations.

This month, analysts are expecting a small gain in employment and no change in the unemployment rate. Payroll tax receipts growth confirms that outlook. Given the data, there’s likely to be little movement on Wall Street this week.

Stocks can rally on bad news, or they can fall on good news. The news isn’t as important as how it compares to expectations.

(Source: Mathematical Investment Decisions)

Payroll taxes are a leading indicator of the unemployment rate. When businesses hire more workers, they pay more taxes. Declines in hiring, or replacing high-wage workers with lower-paid workers, result in less money for the government.

The growth rate of payroll taxes started declining even before hurricanes destroyed businesses in Texas, Florida and Puerto Rico.

For now, there is no sign of a recession. But this indicator could be an early warning sign that all is not well.

It’s important to watch the economic news. In the long run, that will warn us before there’s a bear market.

In the short run, stocks have run up pretty fast in the past month. Like a runner after a sprint, they need a rest. Friday could be a day for stocks to rest after the employment report shows the economy is growing slowly.

Next week, after reading the details of the report, the uptrend in stocks should continue.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader