Update:  The jobs report came in at 146,000, or 54,000 less than estimated, which just puts it in the "large surprise" category.  Based on what I wrote below, I will lighten up for a few days to 50% G, 50% C, and look to pick a better spot to get invested again.

The jobs report could set the tone.  But not the way you might think.

Earnings season is winding down and the market is looking for the next stimulant.  Today's jobs report may be just that.  But what are we looking for?  A very strong jobs report may be good for the short term, and a weak report may be bad, but the days and weeks after the reports have produced results you may not have expected.  This data has been provided by one of my favorite websites, www.sentimentrader.com...

Let’s look at the facts over the past three years: 

• Three days after a large surprise in the jobs report of 50,000 jobs, up or down, the S&P 500 was higher only 5 out of 18 times.  Its average return was minus 0.5%.  Markets don’t like surprises because they create uncertainty.

• Ten days after a negative surprise of 50K jobs or more, the S&P was higher 55% of the time.  Ten days after a positive surprise of 50K or more, it was lower 58% of the time.

• Ninety days after a large negative surprise, the S&P showed an average return of +5.1%.  Ninety days after a large positive surprise, its average return was 1.7%.

• The correlation between surprises in the jobs number and 90-day returns in the S&P 500 has been -.32.  This means that the more positive the surprise, the more negative the performance in the S&P and vice-versa.  Given the sample size, this is significant.

And, perhaps most important of all… 

• If the market did cartwheels for the jobs report and closed higher by 0.5% or more, there was only a 33% chance that is was still higher 30 days later.  If it fell out of bed and declined by 0.5% or more, there was a 93% chance of it being higher after 30 days.

The bottom line is that surprises in the payroll report are more of a contrary indicator than anything.  If we should see a positive surprise tomorrow morning, don’t get transfixed by the economists’ hysteria on CNBC. 

So we may have a playable move coming up today or Monday.  If the jobs report is significantly stronger than expected (estimates are for ~ 200,000 new jobs) or weaker than expected, I will likely lighten up again.  If the report is over 225K and the market rallies strongly, as it says above, the odds favors weakness in the days ahead.  If the report is weak and we see fewer than 150,000 jobs added and the market drops, I will look to buy back in sometime next week. 

Is this enough information to make an allocation change?  We are in one of those periods where the indicators are mixed and anything can happen.  We might as well use what we have to make a decision.  This data is showing a somewhat significant trend.  The best thing for the market would probably be a number in line with the estimates.

The recent rally actually brought the NYSE overbought/oversold indicator higher than where it was at the end of December. 



                                 Chart provided courtesy of www.decisionpoint.com

Anymore strength may be a sign to lighten up.  If we sell off today, the overbought condition will likely be erased in the days ahead.  Remember, we don't really have a strong trend right now.  When the market is oscillating, rather than trending, you sell strength and buy weakness.  But as we have found out, that it harder than it sounds. 
                             
That's all for today.  Currently 40% C, 30% S and 30% I fund.  If I make a move it will likely be after the market opens.  Watch for an email alert or check the message board for updated info.  Have a good weekend.