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Daily Market Update – February 5, 2014 (Close)
This morning the ADP Employment numbers were released.
Ever since they started doing so there’s been lots of disagreement over how accurately ADP’s numbers parallel the government’s Non-farm Payroll statistics that come out two days later. Regardless of the validity of the ADP Report it still has the capability of moving markets.
After last month’s disappointing official numbers the ADP number was pretty much on target for expectations but the market showed some mild disappointment in the pre-open trading, however, it got over that disappointment very quickly.
At this point we’ll have to wait until Friday to have it settled and to see how the market reacts.
About 2 weeks ago I collected some data looking at the relationship, if any, between the Employment Situation Report and market performance. Watching the release of that most recent report and seeing the market react to very disappointing numbers by pushing the market higher got me thinking that it seemed as if the market always went higher with the announcement of those official numbers.
Who knew that in the comfort of my retirement I would actually once again find myself running t-tests?
Looking at 3 years of statistics there was no association between the reporting of data, regardless of its content and how the market did, neither in the week leading up to the report nor the week following. Neither did the day before the report release have any predictive value.
That is unless you looked at the past 18 months.
During that time period there was a statistically significant likelihood that on the week preceding the report and the day preceding the report that the market would move higher.
For those interested in such things the chance that the market went randomly higher on the day of the Employment Situation Report release was less than 4% and less than 2% when considering the prior week.
While that seemed compelling, as with all statistics it helps to look beyond the numbers and try to have an understanding of possible confounders or environmental factors that may have played a role.
Perhaps coincidentally the past 18 months reflected the beginning of the third and final phase of Quantitative Easing.
Because of that possibility I wasn’t terribly excited about being further long the market in anticipation of an additional Employment Situation Report fueled run higher, considering that there appears to also be an association between the announcement of the taper and the market’s fortunes.
In hindsight, starting the week with a 325 point loss seemed to indicate that playing the market for Friday’s report wouldn’t have been a very good idea.
However, about half of the weekly gains seen in Employment Situation Weeks came on the day of the report, suggesting that there might be some advantage to adding long positions prior to Thursday’s close.
While I generally don’t consider index ETF trading, I may look at the possibility of purchasing some SPDR S&P 500 Trust shares with the anticipation of closing the position at the end of Friday’s trading by selling slightly out of the money call options on the position, as premiums are beginning to reflect increasing volatility.
Otherwise, I’m expecting little activity for the remainder of the week, while remaining hopeful that the market shows some stability and even strength as the week comes to a close, as it would be nice to get back to seeing assignments and rollovers just like the old days.
Today was just that kind of day as the market traded in a tight range, something that it had done for most of 2013, but very little of 2014, thus far.
A little telling is that even with today’s very muted action the short term volatility continues to rise and is nearing the October high, which itself was a low high as far as highs go. So the market is still nervous and waiting for any kind of meaningful and sustained move, regardless of direction.
For my part, I hope that this Friday’s performance breaks that recent pattern of downward moving weekly closes and I wouldn’t mind seeing the market take a little rest at this level, particularly if volatility can stay here or even move a little higher.
There’s nothing wrong with wishing for the best of all worlds. We’ve had it before, why not again?
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