Is It Good News or Bad? – Kaufman Signals

If you watch the financial networks, every event, every economic report, every price move is the most important move of the year. It can be exhausting. In previous years we used to watch the Money Supply, I don’t even remember why. These past two years we watch the Employment Report. If employment is up you would think that was good for the economy, but no. If Employment is up then the Fed will raise rates and that’s bad for the economy. Or so the market seems to be saying, and the pundits on the news seem to agree. I’ve observed that they also say the same thing at the same time, often using the exact same words.

So, are more people working good news or bad news? To keep it simple, we’ll look at the SPY and BND ETFs from the beginning of 2014 to now. Specifically,

How did those markets react on the day of the report?
What was the change in price from the close of the report day to the day before the next report?

First, the data. The table below shows the net change in employment for each month. We’re only interested in the data from January 2014 through February 2015, which were all increases. One would think that increases would be positive for the market, but the immediate reaction usually hinges on the difference between the actual number and the expectations. In theory, the market price already reflects expectations.

The next charts show the immediate reaction (on the open, an hour after the report is released) and the end-of-day reaction for SPY and BND. The blue bar shows the opening price change and the red bar the open-to-close change, in percent.

Let’s first look at bonds, on the right. In 8 of 14 cases the price finished in the same direction as the opening gap. In only one case, May 2014, did the price noticeably reverse its direction. We would say that the bond traders were good at figuring out direction.

On the other hand, SPY traders have far less foresight. In five of the cases, the price opened higher and closed unchanged or significantly reversed. In another five cases they were right about the direction. That’s 50-50.

The real direction of the market, and the accuracy of the response, can be seen comparing the closing change on the day of the report to the change for the entire month. Below we again see that the bond traders had it wrong only 5 of 14 months, and right 8 of 14. The SPY traders were right only 3 of 14 months and wrong 7 of 14.

You’ll want to remember that the employment numbers improved in all 14 months, and the bond prices increased in 13 of those 14 months, the reaction we would normally expect – higher employment is good news. The SPY improved 10 of 14 months, still reasonably consistent because better employment should be good for the economy.

Our conclusion is that “good news is good news.” If the SPY sells off on good news that did not meet expectations, the odds greatly favor buying it.