As Jobs Report Approaches, Some Selling Seems Likely

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This week, on Friday April 4, we will receive the Granddaddy of all economic data, the US Jobs Report. The governments digest of the current employment situation; Non-Farm Payrolls, Hourly Earnings, Average Workweek and of course, the unemployment rate has always been closely watched. I remember working in the Tokyo forex market in the early 1990s when the whole company would return to their desks late at night to await the release and the market reaction. This was at a time when inflation was still the biggest worry, and the two indicators of prices, the Consumer Price Index (CPI) and Producer Price Index (PPI), were probably more important.

Now, as the US and the world as a whole emerge from a crippling credit crisis, the employment market is the most watched data point. This week’s numbers, I would argue, even in that context, have particular significance. Not necessarily because of what the numbers actually are, but because of how traders react to them.

When the last round of Quantitative Easing (QE) was announced and implemented by the Federal Reserve at the end of 2012, we entered a weird, topsy-turvy period for the US stock market. Prices began to appear dependent upon the Fed’s continued largesse. Any good news was seen as hastening the day when the Central Bank ceased to create new money and hand it to the banks to invest in stocks, and therefore caused the market to drop. Bad news, particularly regarding jobs, was seen as forcing the Fed to continue QE and therefore the market would jump.

This was an obviously unsustainable and illogical situation. Ultimately a stronger economy overall kept pushing the market up, no matter what. Then, as I talked about in this article, sentiment began to change at the end of 2012. The dreaded “tapering” turned out not to be so scary after all, and when it began everybody chose to focus on the positive message... the market no longer needed support. This was made easier by a continued commitment to ultra-low interest rates, but when the end of that period, too, was envisaged by new Fed Chair Janet Yellen this month, we were back to the old ways; the market sold off on the news that the economy was doing fine.

This week’s jobs report will, providing it isn’t perfectly in line with expectations, give us an indication of whether that was a temporary aberration or the re-emergence of a trend. The prospect of a sell-off on good news has me salivating, and it should you too. I mean, what more could an investor ask for? The economy shows signs of continued improvement, but stocks trade lower, giving a perfect opportunity to put sidelined money to work.

Of course, it may not happen. Traders, and markets in general, don’t remain wedded to ideas or interpretations. The “sell on good news” mentality probably cost some people some money given the performance of stocks in the second half of last year, and nothing changes a trader’s mind faster than red ink. Those prone to a bearish reaction would maintain that the prospect of higher rates is different, however. What they are reacting to this time, the logic goes, is not having their free money taken away, but rather an action that could have a significant slowing effect on economic growth. We have a decent chance that traders will once again sell on good news, but for different, maybe more valid, reasons. They may not, but the best play is on the possibility that they will.

If nothing else, then as attention shifts to the upcoming jobs report, it’s likely that some selling will be seen, just in case. In that case it may pay to short the general market, even just as a short term hedge. Given that this will be a short term hedging position, it may be one of the few times that a leveraged, inverse ETF such as the Direxion Daily S&P 500 Bear Fund (SPXS) makes sense. In general, leveraged short funds are a terrible idea for most investors and semi-active traders. Part of the reason why is contained in the name of SPXS, the word “Daily.” The daily reset of these instruments mean that they don’t reflect long term trends. Also, the relative expense of running a short position (and even more so a leveraged one) means that high fees make them even less desirable for any extended holding period.

I cannot stress enough that I would not normally recommend SPXS and other similar funds, but for a strategic play that will last a matter of days rather than weeks, they are suitable. Should the market get jittery over the next few days and lose 3-5%, your return if you own SPXS won’t be three times that because of the factors above, but a 7-12% return is possible and that is not bad for a short term position. The downside is also magnified, however, and that makes it a position that is dangerous to run through the actual Jobs Report itself. I would favor squaring up, win or lose, by the end of Thursday.

This kind of play is, by definition, based on feeling and intuition rather than hard data and that may put some people off. I would say, however, that my feelings here are based on decades of being paid to interpret and predict traders’ actions and reactions. Part of the appeal of this is that I find it hard to envisage a situation where this week sees any strong buying with an unemployment number looming, so the downside to the trade can be limited by a fairly close stop. SPXS closed Friday close to $31 and is indicating lower this morning, so a stop around $28-29 would limit losses to around 5-7%.

Sooner or later, we have to return to the real world, where good news is seen as good and bad news is seen as bad, but, for this week at least, there may be one last opportunity to profit from the prospect of the opposite happening.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Economy , Investing Ideas , US Markets

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Martin Tillier

Markets, Bitcoin
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