Thursday's strong jobs report triggered another wave of selling because we're in the part of the cycle where good news is bad news, and bad news is up for interpretation. But don't take my word for it; peek at the rate hike odds on the CME FedWatch tool.
On Jan. 4, the odds of a rate hike of 50 basis points at the Fed's Feb. 1 meeting were 30%. But after yesterday's ADP jobs report, those odds jumped to nearly 41%. The odds still favor a rate hike of 25 basis points, but up until yesterday morning most traders believed outsize rate hikes were behind us. The prospect of 5% or higher interest rates clearly weighs on stocks.
The S&P 500 and Nasdaq Composite are still trading within the same range I've referenced for the past few days. But with the government's employment situation report on deck here on Friday morning, it's impossible to say where stocks are headed.
The short-term bullish scenario for the Invesco QQQ Trust (QQQ) , and the outcome I hope for, is a near-consensus gain in nonfarm payrolls and average hourly earnings month over month.
If this scenario occurs and stocks gap down to start the day, I'll look for any hint of strength and a move above the session's volume-weighted average price (VWAP) to trigger a bullish reversal. Barring a payroll number far below consensus, I wouldn't expect a massive rally. And remember, while the stock market wants to see a move higher in the unemployment rate in the near term, an over-acceleration in job losses will trigger fears of a sharp slowdown, which won't be good for stocks, either.
On the stock side of things, Datadog (DDOG) and CrowdStrike Holdings (CRWD) were favorites among momentum traders throughout 2020 and 2021. They held up better than most in 2022, but investors now appear to be dumping these stocks. Though I am not interested in picking a bottom in these or any stocks, DDOG and CRWD both maintained better-than-average growth rates in 2022. Keep these two stocks on your watch list for when the selling runs its course and tech buyers return to the market.
