Expect a Market Reversal after the Next Payrolls Report

Includes: DIA, SPY
by: Andrew Hart

On the first Friday of each month at about 8:30 am est, the US Dept of Labor/Bureau of Statistics releases the Nonfarm Payrolls report. This report basically attempts to measure the change in payrolls/jobs over the past month (excluding farming industry).

The beginning of each month is often greeted with trepidation by the investing community. While the economy continues to suffer into a deep recessionary environment, the monthly non-farm payrolls figures by the Bureau of Labor Statistics continue to hemorrhage jobs.

Below is a graph of the three-month average of the Non-Farm Payrolls Change since 1970. Drilling down in the data, the last three non-farm payroll reports have seen the number of jobs decline 681K, 655K, and 651K, for a three-month average of 662K loss.

As the graph shows, non-farm payrolls have not only declined in a waterfall-like fashion, but it is also the steepest downturn in decades. In terms of job loss, past recessions (of the last 40 years) pale in comparison to the current situation. Today's economy has blown through previous three-month changes by a wide margin (300K+).

Non-Farm Payrolls since 1970

As if the non-farm payrolls aren't bad enough for economy (in terms of jobs being lost), the equity market has ravaged investment accounts amid this period. Unfortunately, some investors have been 'deceived' in thinking a bottom was at hand over the past year every time the market shook off the payrolls report. I say 'deceived' as the equity market (using the S&P 500 Index as the benchmark) has responded positively the day of the non-farm payroll report only to have the rug pulled underneath investors feet in subsequent trading.

Below is a table that describes the price action of the S&P 500 Index (SPX) the "Day Of" through 21 days following the unemployment report since 2008.

"Post Non-Farm Payrolls" (light gray box) shows the average and winning percentage following the report. "At Any Time Since 2008" (dark gray box) shows the performance of the market on any given day (or average) over the same time period as the "Post Non-Farm Payroll" study.

S&P after Non-Farm Report

Standing out from the data is that the Friday of the non-farm payroll announcement, the SPX has actually gained 0.07% with a winning percentage of 60% (versus the At Any Time Average of 49.66%). As aforementioned, the market strength the day of the announcement was a mirage. The subsequent price action saw the market fall apart in days 3 through day 21 following the report. More specifically, the winning percentage fell from 60% to 21.4% to 42.9% (day 3 to day 21) while the SPX return average declined to -2.36% to -3.62% loss (day 3 to day 21). These averages (win % and average return) are well below the At-Any-Time averages over the same time frame. Simply put, one day's price action is not indicative of future price action. The 3-day and 5-day reactions in particular, show signficant underperformance (seen by the red columns in the above chart).

What short-term traders can glean from this data is to expect a possible rally on the day the next Payrolls Report is released, but look for a market reversal in the 3 to 5 days following the report. In addition from the bigger picture, the actual numbers (in the top chart) would need to turn around from 40-year lows in order to show a recovering economy. Even the first blip "up" would probably cause a short-term market rally, but the actual number needs to steady back into "normal" areas and even show gains to confirm the "recession" may have ended.