Thursday, March 31, 2011

Can Markets Rally On April Fools' Day?

The markets have been grinding higher over the last two weeks, breaking back up through several key technical indicators and frustrating the bears in the process.

Tomorrow begins the start of a new month, and a new quarter. And everyone is waiting for the big jobs number at 8:30am. The problem is I don't see how the market rallies tomorrow, no matter what the jobs number is.

The market is already feeling a little overbought in the short-term. So investors need a new catalyst to drive the market higher.

Let's look at 3 generic scenarios for tomorrow:
  • The number comes in on expectations. Under this scenario I expect to see a "sell the news" reaction. Many analysts have already ramped up their expectations for tomorrow. A good number is already priced in. If we see a strong number the natural reaction will be to lock in recent profits pushing the market lower.
  • The number comes in much better than expected. Many would suggest that a much stronger number would result in a big rally (and in fact that is what many traders are betting on). But in my opinion a strong number will simply reinforce fears of no QE3 and result in a sell off in the market.
  • The number comes in worse than expected. This, for me, is the trickiest scenario. On the one hand a weaker number should see selling as disappointed traders sell stocks they bought in anticipation of a good number. On the other hand, a weaker number will support calls for QE3 and may have the perverse effect of putting a bid to the market. I think the net effect will still be a negative, but my confidence level is lowest under this scenario.
The other thing to keep in mind is that tomorrow is the first trading day of the month. Last month I wrote that I was expecting a negative start to March in First Trading Day Of The Month - Voodoo Statistics. In that post I suggested that both March and April could see negative returns on their first trading days. The first trading day in March ended up being a large negative day. The analysis still holds for April and further argues for a negative day tomorrow.

I scaled back a number of positions today, both long and short, but remain small net short going into tomorrow's number.

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