Why Today Will Be A Critical Day For Markets

Keep Your eye on today Friday February 7th. It will be a big day for the stock markets and could change everything…

Before I explain why, let’s review what has been happening so far.

This year stocks are down 5% since their peak in December. Both the Dow and S&P500 recently broke key support levels. Once these key levels get broken, algorithmic programs kick in and that could lead to a much quicker fall in the markets.

The volatility index (VIX) has surged higher showing fear returning to the markets. Take a look at what happens when the VIX closes above its monthly 20 moving average (red line):

As you can see, the message is mixed: sometimes when the VIX gets above its 20 moving average (as in 2012 and 2010) it acts as a contrarian signal and the market quickly bottoms and rallies. However, in 2011 and in 2007-2008 it acted as a strong warning signal of a much deeper market correction (or crash).

It is clear that stock markets are right now in “risk off” mode as money has shifted away from stocks (risk) and into bonds and the Japanese yen (safety). Here’s a chart of yen and stocks:

So if you want to know what will happen to stocks this month, keep watching Japanese yen and bonds.

And this Friday February 7th could be a deal breaker. Here’s why:

The December jobs report (NFP) was terrible – only 74,000 jobs added. That was a shock to the markets as 196,000 jobs were expected.

So this Friday’s jobs report is going to be absolutely critical. It will tell us whether the December report was either just a “one-off” fluke, or the start of weakness in the economy.

Right now, investors are expecting 184,000 jobs to be added for January. If those expectations are not met and if the jobs report turns to be another disaster like in December, then this could start speculations as to whether the Fed will stop tapering and increase quantitative easing.

Quantitative easing of course will be bad news for the US Dollar and cause it to decline. This would be bullish for the Euro and potentially even gold.

On the other hand, if it’s a positive report and job expectation are met on Friday, we could see the dollar rally and the euro fall.

What impact a positive jobs report will have on stock markets is unclear. Will “good news” be “bad news” for stocks this time?

Good job numbers could be a sign that the economy is back on track and that the Fed will continue to taper (and put the brake on quantitative easing). This could be negative for stocks as it adjusts to this environment.

On the other hand, if the positive report calms fears of an economic slowdown, we could see money coming out of safety (yen and bonds) and back into stocks (risk).

The key levels to watch this week is 1755 and 1775 on S&P 500 (futures). If stocks get above that level, bulls can take control and continue the rally. If they can’t, then stocks could be in trouble…

Alessio Rastani is a stock market trader at www.leadingtrader.com

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