Will Stocks Falter with Real Unemployment at 18%?

Unfortunately, job cuts have affected every industry sector, and that's a sure sign that we are poised for a correction.

The unemployment picture painted by media headlines is much rosier than reality. The latest unemployment numbers according to media reports "surprisingly fell to a five-month low of 9.7 percent."

Yet, the Dow broke below 10,000 for the first time in months. The real unemployment number reported by the Bureau of Labor Statistics (BLS) is much higher and scarier than they want you to believe. What's next?

The BLS publishes different sets of data on a regular basis. The main focus tends to be on the U-3 unemployment rate (currently 9.7 percent, seasonally adjusted).

U-3 is the "official" unemployment rate and illustrates total unemployed persons as a percentage of the civilian labor force.

U-4 is another category that includes unemployed workers plus discouraged workers. A discouraged worker is someone who's available to work but has stopped actively seeking for work.

U-5 unemployment includes the number of unemployed workers, plus discouraged workers, plus marginally attached workers. A marginally attached worker is someone who is able and willing to work but is not actively seeking work.

U-6 is as close to the real unemployment figure as government reporting gets. This number includes unemployed workers, plus discouraged workers, plus marginally attached workers, plus workers that are forced to work part-time because they are not able to find a full-time job. Put another way, it's the most realistic picture of today's job market as any.

According to the Bureau of Labor Statistics, the number of U-6 unemployed workers is 18 percent (not seasonally adjusted - 16.5 percent). This is the highest number of record.

Keep in mind that neither of the above categories encompasses another important element of the labor force; unemployed self-employed" workers. If you're a handyman or contractor next door, or a small business owner who can't secure work, you are not included! Adding these folks to the mix would put the real unemployment number above 20 percent!

No one is spared: Unfortunately, job cuts have affected every industry sector. Job cuts in the technology sector (XLK) have reached the highest level in four years.

Even WalMart, a low-price leader and a virtually recession proof outfit, continues to cut jobs. This trend has spilled over and continues in the entire consumer staples (XLP) and consumer discretionary sector (XLY). Ericsson and Pfizer are just a few companies eliminating employees at a record pace.

According to a report by global outplacement firm Challenger, Gray & Christmas, U.S. employers began the year 2010 by announcing 71,482 planned job cuts, the highest tally in five months. The report, however, said that the increase in layoffs should not be seen as a sign of "recession relapse."

The one constant: On a daily basis, economic news comes and goes. Some will influence the market, others won't. If you've been following news reports and corresponding stock prices, you will have noticed that the correlation between good news and higher prices or bad news and lower prices is less than obvious.

What remains constant, however, is the pattern of behavior investors have established for hundreds of years: extremes in sentiment which invariably results in extreme reactions. This is called the herding effect and is rather predictable.

Crowd behavior of investors is largely driven by perception. The perception that stocks will continue to rise is starting to change, if it hasn't already. Soon investors will refocus on valuations to see if a stock is worth its price tag. It was the return to due diligence that pummeled stock prices throughout 2008.

Interestingly, the 2008 declines were also preceded by extreme optimism and a feeling that stocks have nowhere to go but up.

Historically, stocks are grossly overvalued and due for another major correction. How major?

The ETF Profit Strategy Newsletter includes a detailed short, mid and long-term forecast along with a target-range for the ultimate market bottom based on historically indisputable evidence.

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