Not Too Hot, Not Too Cold, The Jobs Report Needs To Be Just Right

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1/4/24

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The S&P 500 dropped by around 35 bps on the day, with most of the decline coming in the final minutes. Today, there was a large sell imbalance that was $4.1 billion, which helped to create that wave of selling into the close.

The level of support was 4,700, which has been the important level for a few days, which has been the put wall in the 0DTE complex. With the monthly OPEX so far away, I tend to think the 0DTE complex carries weight at this point. But with that level now broken, the next level from a gamma perspective will come at 4,650 for tomorrow.

Tomorrow is the job report; the data will determine what happens from here. I think it is simple: data that comes in mostly inline or stronger likely leads to higher rates and odds for rate cuts in March getting pushed out to May or June. Analysts’ median estimates are 175,000 and don’t seem overly aggressive, while the unemployment rate is expected at 3.8%. The Bloomberg whisper number is for 185,000 tomorrow, and Kalshi shows expectations for an unemployment rate of 3.7%.

Even if the numbers come in at analysts’ forecast, arguing that the Fed should rush to cut rates is tough. It would take a big miss on the headline numbers and the unemployment rate to get the Fed to cut rates sooner rather than later.

Vol

The market doesn’t seem overly nervous heading into the report with the cost to buy an at-the-money put and call for tomorrow’s expiration at just 62 bps, while the VIX is at 14. Granted, the VIX is up off the lows of around 12 at the end of December. But this 14 level has been important, and moving above 14 likely opens the door to expanding levels of volatility.

I think the odds for volatility to expand are pretty good here because, for equities, it needs the data to come in just right. If the data is too hot, rates will rip; if it is too cold, then growth concerns and recession worries will mount. There isn’t much data to support that the BLS should miss estimates because most of the job data we have witnessed has been consistent with a strong job market. The data tomorrow is a government report, and government reports aren’t always the most reliable and tend to be subject to big revisions in, might I add, a presidential election year. 😉

S&P 500

That said, if the market can gap higher tomorrow and take out 4,725, it can be off to the races and maybe even fill the gap at 4,770. However, if the gap is lower, it would create a breakaway gap, which could put us on a course to 4,640 and probably lower than that over the coming days.

10-Year

We also saw the 10-year today move back to 4%; while it needs confirmation with a move higher tomorrow, the 10-year Treasury may have broken out, and that could be setting it up to run to around 4.1% to start, potentially on to 4.25% and beyond.

Well, see what the job report says tomorrow.

-Mike

Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.