Bearing with the Unbearable Bear Market Rally

The summer has been unbearable for the bears --- the three main stock indices, Dow Jones Industrial Average, NASDAQ and S&P 500, continued their gravity-defying rally last week. Dow Jones Industrial Average (DJIA) closed at 9,370 and went up by 2.16%; NASDAQ and S&P 500 both achieved year-to-date highs and closed at 2,000 and 1,010 respectively. The stock markets on the other side of the globe, however, started to show some weaknesses. The Shanghai Stock Exchange Composite (SSEC), which has outperformed all stock markets in the world so far this year, lost 62 points and closed at 3,349. Hang Seng Index from Hong Kong also suffered a 197-point drop and closed at 20,275, trying to stay above the key 20,000 level. Although there is not enough empirical evidence to show a high correlation between the Asian and North American stock markets, the current deteriorating condition of the Chinese and Hong Kong indices do warrant some caution for the investors.

The good news, or the so-called “good” news, was the unemployment number announced last Friday. According to the U.S. government, the unemployment rate in July was 9.4%, far better than 9.7%, which was expected by most economists. The bulls celebrated this “good” news as long as they saw the number was lower than 9.7%, ignoring the details of the report. Abby Cohen, a senior investment strategist at Goldman Sach, even proclaimed that it is the beginning of a new bull market; she also predicted that the S&P will hit 1,050 to 1,100 in the second half of this year.

Perhaps I am a curious person with too much time and too much energy, I cannot see how this “better-than-expected” unemployment rate as something positive when I dug up the details of the unemployment report. First of all, let’s see the definition of the “unemployment rate.” According to the report released by the U.S. government, it is the percentage of job-seeking individuals who cannot find a job over the "total labor force." However, the unemployment rate does not count the number of people who give up looking for a job. Those people are called “discouraged workers,” who simply throw in a towel after sending out hundreds of resumes without getting called. And how many people were discouraged workers in July? 796,000, up 335,000 over the last 12 months!

Besides the “discouraged workers,” there are also people who are “marginally attached to the labor force.” Who are these people? According to the definition released by the States, they are the people who cannot find a job for about a year and have just stopped looking for a new job 4 weeks prior to the survey. In other words, they are the potential discouraged workers. How many of them? 2.3 million, up 709,000 more people compared to last year!

So, let me grab my calculator. The number of unemployed people up to July was 14.5 million, which is equivalent to 9.4%. However, if we count the people who are not going to work anymore and the folks who just threw in the towel 4 weeks ago, the “actual” unemployment rate was to 11.4%! I call it “actual” because they are, literally, not working at all. And how could it be good news?

But it doesn’t matter. The stock market is now at a party mode where good news is good news and bad news is good news. It is like the ultimate financial consequences of a marriage --- your wife’s money is her money, your money is her money. However, I do sincerely suggest you to sell your long positions as the Asian markets have now deteriorated, indicating the speculative craze has now become subdued. If you are aggressive, consider adding short positions for an impending correction that would come as early as some time next week.