Professor’s Comments October 21, 2013 Into the Close

Posted by OMS  at October 21st, 2013

As you most of you know, I started to lighten my portfolio on Friday.  I mentioned several reasons for doing this in the WSR,  but there’s yet another.  It has to do with tomorrow’s payroll report. 

Tomorrow morning at 8:30am, the Labor Department will release the September payroll data, which was delayed because of the 16-day federal shutdown.

Because the September jobs report will be delayed for a bit longer, the payroll data will carry a lot more weight than usual.

We found out today that home purchases fell in September. This was the first time that the purchase of previously owned homes fell in three months.  It could be a sign that the economy is slowing.  And the lost wages from the shut-down, both government and private industry, and lost consumer sales, could make things even worse.  We simply don’t know.

As you know, I do not like to guess about what might happen.  I would rather see the report, then see the market’s reaction to the report, and plan my trades accordingly. 

Bottom Line:  I don’t want to be owning a lot of stock going into the report.  I believe that there is too much risk associated with this particular payroll, either way.

Here’s the thing:  If tomorrow’s report is weak, it will likely mean that the Fed’s tapering of the Fed’s Bond and mortgage purchase program will be delayed.  But if the report is very week, it could delay tapering well into next year.

This will likely be good for equities, bonds, and at least for the short term, good for the metals.  It would mean that the Fed’s policies could be extended into late 2014, possibly longer.

However, IF the payrolls report is strong, and the Fed decides to begin its tapering program early, it could cause the market to start a significant pullback.  I showed this possible pullback in the chart of the SPX over the weekend.  Right now, the S&P is overbought and near the top of a trend line of an Ending Diagonal Pattern.  The lower trend line in this pattern is near the 1660 level.  It would be entirely normal for this to happen within the Pattern, but it could cause folks with a lot of equity exposure significant pain.

My next Update will be after tomorrow’s report.  This will give my algorithms a chance to assess the impact.  However I want you to know that I have reduced my position in equities to about 40 percent from last week’s 90 going into the report.   I just feel that given where we are in the pattern, it’s better to be conservative and error on the side of caution.  

That’s what I’m doing,

h

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
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