QVMS - A Selloff To Start The New Year

Summary

• Will a decent payroll report be enough to save this rally?
• The market is caught between a rock and a hard place, but we could see a substantial move soon.
• I remain cautious, and implementing hedges seems wise here.
• The next few trading days should be interesting, but we should see SPX break out of its trading range.
• Despite the likelihood of more near-term volatility, my year-end SPX target remains at 4,500.

Many stocks surged to start the year, leading to a 3.4% return going into the jobs number Friday. Things could change drastically as a substantially better-than-expected jobs report could sink the stock market. We received a higher-than-expected ADP number yesterday, and today's nonfarm payrolls could also come in hot. Therefore, the probability of a 50 bps benchmark rate increase at the February FOMC meeting would rise. This dynamic could put increased pressure on stock prices and other risk assets in the near and intermediate term.

Here Is What The Market Expects

The market expects a 200K payrolls increase for December, and the unemployment rate is expected to remain at 3.7%. Last month, the labor market beat the 200K estimate with 263K jobs. Also, yesterday's 235K ADP figure crushed estimates for just 150K, implying that Friday's number could come in hot. The goldilocks zone is likely around 150-200K, and a payrolls number around there could enable markets to move higher in the near term.

Here's What The Market Could Get

Anything north of 220K, and we could see a new selloff begin. A number in the 250-350K range could send stocks tumbling as probabilities for a 50 bps hike rise at the upcoming Fed meeting.

50 Bps Move Odds Increasing

Before the ADP number and other stronger-than-anticipated economic data, the odds for a 50 bps rate increase were around 20%-30%. However, now the odds are around 42%, and if Friday's jobs number beats, we may see the odds rise to 50% or higher. This would be a negative development for stocks. Thus, we want the job number to be 200K or lower.

Technical - SPX One-Hour

SPX has been in an intensely tight range since the volatility subsided several weeks ago. SPX has been trading in the 3,900-3,800 range for nearly the last three weeks. The jobs report should enable a breakout or a breakdown to occur shortly. If a bullish jobs number materializes, SPX could explode above 3,900 and possibly breach the 4,000K SPX level. Therefore, there's plenty of upside potential for stocks if the market gets a suitable number the Fed can get dovish about soon. On the other hand, if the job number is worse than the market expected, prepare for a significant correction to materialize.

What I'm Doing To Stay Ahead

I entered the year with a relatively defensive All-Weather Portfolio "AWP" positioning. However, the AWP is off to a hot spot, up by more than 3%. Still, I remain cautious here. Therefore, I'm implementing hedging positions on several higher-risk names that may decline substantially if the market turns south after Friday's jobs report. I'm using collars on several stocks, including Nvidia ( NVDA ), Palantir ( PLTR ), and other higher-risk tech names .

More specifically, I opened collar hedges on several stocks, including Nvidia, Palantir, Zoom ( ZM ), Block ( SQ ), and AMD ( AMD ). For instance, I recently sold the February 24th $65 SQ calls for around $6.40. That's a 10% premium. Then I split the collar put into two put options: 50% on January 20th, $60 put for $1.63, and 50% on February 17th, $50 puts for $1.24. Similar strategy with the other stocks - NVDA February 17th $145 calls for $10.50. Then purchasing February 17th, $115 puts for $2.40 and $110 puts for $1.70.

Therefore, I'm hedged and prepared if the market takes a tumble in the near term. I also will reduce riskier positions if critical support levels like 3,800 in the SPX get broken. Also, I will put on additional collar hedges if price action worsens around 3,800 in the SPX.

The Bottom Line

We needed a good job number or the stock market could stumble. If 3,800 SPX gets breached, the market could head substantially lower. We may see a retest of the 3,500 level and, worse over, possible lower lows. If earnings continue coming down, P/E ratios could compress further, causing stock prices to shrink soon if support collapses.

Here're The Results

Slight beat, but not disastrous. This reading keeps us near the goldilocks zone, and the beat could have been much higher, provided the recent ADP number. Unemployment also fell noticeably to an incredible low of 3.5%, beating the projected 3.7% unemployment rate estimate. Also, average hourly earnings took a notable hit, rising by only 4.6% vs. the 5% estimate. This dynamic implies that wage increases are not keeping up with inflation, and consumers are losing more buying power.

Therefore, we see some positive and some harmful elements in this report, but the biggest takeaway is that inflation continues to come down, and the labor market remains strong. Therefore, there's a high probability of a rally here in the near term. I'm staying long here, and my 2023 year-end target for the S&P 500 is 4,500, roughly 18% above current levels. Stay patient! We may even get better buying opportunities in Q1 soon.

SPX: Post Jobs Data - Moving Higher

Vital reaction post jobs here. Now we need the SPX to climb above 3,900 resistance. A decisive breakout above this crucial resistance point will likely take the SPX to 4,000 and possibly higher. On the downside, we stay mindful of critical support at the 3,800 level. I remain long a diversified portfolio with hedges here, and my year-end SPX target remains 4,500.

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