This week has had economic reports on housing and personal income, but the main focus of the week will be employment. The ADP report, weekly jobless claims, and monthly employment report will be released over three consecutive days, and we should remain fixated on these numbers. Simply put, employed workers have the ability to service debt, invest in the markets, and consume, but the unemployed, on the other hand, do not. Some may argue about employment's ability to forecast future events (we are often told it is a lagging indicator), but in a recession that was driven by home foreclosures, the inability to access credit, and a shift toward savings, those who ignore these reports do so at their own risk. While the slowing rate of decline offers hope, we must watch these metrics closely. Each job lost puts us closer to a tipping point where the economy will enter a tailspin. I am not sure where the line exists, but to pretend it does not is foolish.

While Wednesday's ADP employment report is expected to show 340,000 more jobs lost, my focus is on Thursday's weekly employment report and Friday's July employment report. For the weekly numbers, the elusive spike lower remains in question. For the past four weeks in my weekly newsletter EPIC Insights, I have highlighted a conundrum with respect to employment. Historically, spikes lower in weekly jobless claims have closely aligned with the ends of recessions. Such a spike appeared to occur four weeks ago, but confusion regarding seasonal adjustments caused by the timing of auto industry plant closings had many questioning the data. After two weeks, we saw a 15% spike lower, which historically would be among the largest recession-ending events. With claims increasing over the last two weeks, the spike is now 5%-a level well below prior recession-ending events. The consensus now calls for a slight decline in claims which would maintain the five-week decline near 5%. As data is released each week, evidence that the initial spike is a further false start and the recession is dragging on builds.

The July employment report offers similar issues. Nonfarm payrolls are expected to decline an additional 325,000 as the unemployment rate increases to 9.6%. The bulls will highlight that in January we lost 741,000 jobs and therefore the current loss is a 56% improvement that will lead the economy higher. I point out that one year ago the monthly loss was only 128,000 and that things remain very bleak. Further, studying long-term trends reveals that we cannot rely on history to help us predict the future. Examining periods of sustained job loss since 1948 indicates that we are in uncharted waters. The numbers of consecutive months we have lost jobs, total jobs lost, and job losses as a percentage of the population are above any levels seen since the Great Depression. Some will argue that this means the trend must end and subsequently reverse. However, all traders know that just because a trend has extended does not mean it will immediately change course. In this case, relying on the past to predict the future is nothing more than a leap of faith.

In a market that is overbought following a series of sharp rallies, we must remain alert. When trading, the direction of the news matters less than the market's reaction. Lately, every data point has served as a reason to move higher. I will closely watch the next three days to see if this pattern continues.

by Sean Hannon, President of Epic Advisors LLC.

Unemployment