The S&P 500 jobs dance

It’s that time again—employment report Friday is on deck tomorrow.

What’s that mean? Well, some stock traders will probably tell you it usually means relatively tame trading the day before the report, maybe some pre-market fireworks in stock index futures right after the numbers are released at 8:30 a.m. ET, and more volatile trading the remainder of the day as the market attempts to gauge the report’s supposed bullishness or bearishness. Check out the action after the October 6 jobs number:

December E-Mini S&P 500 futures (ESZ7), 10/5/17 – 10/8/17

Source: OptionsHouse

The real story—at least in terms of what the market does in the week after the jobs report—is a little messier. But also more interesting.

Let’s break down some numbers. Since January 2000 and through last month, 215 monthly jobs reports have hit the wire under every imaginable market condition— financial crises, recessions, bull markets, bear markets. The jobs numbers themselves have been good, bad, and surprised both up and down. Some traders anticipate strong (especially surprisingly strong) jobs reports as short-term stock market buying opportunities, while hoping to pounce on unexpectedly weak jobs numbers in the opposite direction.

Easier said than done—and maybe not even the right approach. Overall, the SPX has weakened in the first five days following these monthly jobs reports, with the first day after the report being something of a coin flip, and the next four days posting a negative average return and closing below the close of the report day more often than not.

But, you may argue, that doesn’t take into account whether the SPX closed strongly or weakly on the day of the report—something that could be interpreted as the market’s end-of-day decision on whether the report was bullish or bearish. And this is where things get more interesting.

For simplicity, let’s say a strong SPX close on report day is one where the index closes in the top 20% of the day’s range, while a weak close is one where it closes in the bottom 20% of its range. Since 2000 there have been 77 strong-closing jobs report days and 41 weak-closing jobs report days. The following chart shows the S&P 500’s median return from the close of the report day to the closes of the next five days after both types of day.

S&P 500 (SPX) after monthly jobs report, January 2000-November 2017

Source: E*TRADE (data)

The takeaway:

●After the strong-closing report days, the SPX put in its weakest overall performance in the first two days after the report, with typically negative returns and closing lower (that is, below the close of the report day) nearly 60% of the time. By day 4, the return was positive, and the odds of a higher close were at least above 50%. So, marginally bullish, and not right away.

●The most consistent—and seemingly commonsense—result was the SPX’s performance after weak-closing jobs report days. The index was trading below the close of the report day 56-60% of the time two to five days after the report, with a -0.27% median return at day 5. The first day after the report was—you guessed it—the wild card: The SPX actually closed up 66% of the time.

These are the kinds of contrary moves that can trip up traders looking for clear-cut—and logical—market moves tied to economic releases.

How the market closes the day of the jobs report may provide some clues about upcoming market direction, but there can be misleading moves before the trend shakes out. Bottom line: Keep your head up, and your wits about you.


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