Every Thursday the Labor Department releases its accounting of initial and continuing unemployment insurance claims.  Overall, initial claims continue to hover around bottom, with the most recent seasonally adjusted figure standing at 366K, a decrease of 5,000 over the previous month or an increase of about 13,250 over the average January figures (claims reached their low point in the second week of January).

Initial claims and the s&p 500

A like story continues to hold for continuing claims, with the most recent reading at 3.224 million, an increase of 8,000 over the adjusted prior week’s count.

continuing claims and the s&p 500

With initial and continuing claims continuing to hover around bottom, the question becomes: how long can the hovering go on?  Well, the simple answer is: potentially for quite a while, although the probability of a correction happening before the end of the year continues to increase.

The following figure represents the area difference between initial claims and the S&P 500 (INDEXSP:.INX) (the difference between the orange and blue lines in the first figure of this article).  The difference bottomed out in March 2009 and has since been on a relatively moderate path towards strength, with the most recent differential at about the same place as in February 2004.

Area between initial claims and s&p 500Equity market bulls will no doubt consider this as evidence that the market has a good deal of time before any correction becomes readily apparent.  How long?  Well, given how deep of a recession and the steadiness of the moderate recovery has been, probably a good two years, if not longer

In contrast, equity market bears can certainly point to the following figures, wherein it shows that the relationship between the S&P 500 and initial claims.  Since the early season of 2012, the relationship has been in the first quadrant, which is the most desirable quadrant to be in – high equity values and low initial claims.  The first six readings of 2013 have also been in the top left quadrant.

How long can the relationship stay in the first quadrant?  Well, it was there for 2000, after which it fell out for six years.  Then, the relationship reached back to the top left quadrant for all of 2007 and half of 2008.  Most recently, the relationship between initial claims and the S&P 500 (.INX) reached the first quadrant for almost all of 2012 and all of 2013 (to date).

Essentially, if past history gives any indication of future performance, in about six month – at max – the equity markets will turn into a deteriorating pattern.

Overall, both bears and bulls can find some evidence in the initial claims and the S&P 500 (INDEXSP:.INX) returns data to justify further expansion.  If considering only the relationship between initial claims and the S&P 500 (only this relationship!), for bulls, the length of the current strength could probably be another two years, whereas for bears it’s probably around six months.

Initial claims and the s&p500 2000 2001 2002 2003

Initial claims and the s&p500 2004 2005 2006 2007

Initial claims and the s&p 500 2008 2009 2010 2011

Initial claims and the s&p500 2012 2013 2000 2013

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