February 2011 Employment Report

The much anticipated employment report for February was released this morning. The expectation was for an increase of about 200,000 jobs, while anticipated changes in the unemployment rate varied over a wide range. Here is a summary of the report, and a link to the CNBC video discussing it.

Today's market action illustrated an important concept  -- the whisper number. While there are official expectations (the market consensus), often the market has already priced this expectation in prior to the data release. The result: the market rises in anticipation of the number, but sells off when the expected number occurs. This is the basis of the old saying: "Buy on the rumor, sell on the news." Markets often do this. I prefer a re-wording of this: "Buy on the mystery, sell on the history." The whisper number is an unofficial number, representing what market participants actually want to occur for the market to move higher. Going into today, the expectation was +200,000 jobs, but the whisper number was much higher: +280,000 - +300,000. Since today's number was well below the whisper, hitting the consensus value was anticlimactic, so the market sold off. Note, however, that prior month values were revised higher as well, so this month's number was actually better than the 192,000 reported.

An hourly chart of the Dow-Jones Average helps to show this (click to enlarge). Note how the first four hourly candlesticks were bearish -- solid real bodies, indicating that the close for each hour was below the open. The fifth hour candle was a doji, touching the prior low. Recall that a doji indicates a "toss up" in terms of momentum. That candle actually marked a turning point, as the final two candles were bullish, with the first of these constituting a bullish engulfing pattern of the doji. The final candle of the day has a wider range and a large real body.

Throughout all of this, the Dow Jones remained in the uptrend that began late February (see dashed line). While today's price action erased much of yesterday's large gains, some of those gains remained.

Not all of today's Dow Jones action was related to the employment report, of course. There was a vary favorable factory orders number (+3.1%), the most rapid rise in years. Adding a seemingly more rapid trend in employment and the improving factory orders, oil prices rose sharply. The price per barrel of oil (West Texas Crude) closed the day at $104.91, an increase of almost 3 percent compared to yesterday.

So, while the talking heads appear all too willing to believe that the market won't be able to rise with oil above $100/barrel, the fact that the uptrend in the Dow Jones remains in tact, would appear to contradict them. What will it take for oil prices to rise dramatically? As I stated in class a while ago, dramatic reductions in either oil production or shipping in the middle east. This could happen. For now, the markets have not priced that risk in yet.