The Gap Guy

On the first Friday of every month, the U.S. government releases its various employment metrics that include: non-farm payrolls, the unemployment report, average workweek, and average hourly earnings.  Collectively, these reports are often called the "Jobs Report."

These labor market indicators are followed closely because they generally indicate the health of the U.S. economy and whether it is expanding or contracting.  In simple terms, a decline in employment generally portends a slowing in consumer spending and vice versa.  For more info, check out this page on Investopedia.com.

I normally don't pay much attention to the news and various economic reports when playing gaps, but this report is the exception.  Today was a great example of "why."  At the open there was a reasonable and inviting gap "up" in the S&P 500 (about 4 pts).  In fact, it opened in the single highest probability zone for gap fading:  just beneath the high and above the close of a prior "up" day, which has an 82% historical gap fill win rate.

But I didn't fade it, because my research shows that fading "up" gaps on the day of the Jobs report has historically been a money losing setup.   Below is the summary of doing so from 1998 - 2007 when using an "end of the day" stop. Note how the win rate (65%) is below historical averages (~72%) for fading opening gaps in the S&P and how, even when using "no stop," it did not make any money as evidenced by the profit factor of .87:

Taking the research a step further and assuming one used a 6 pt stop, showed  the following:

> fading "up" gaps and using a 6 pt stop:  56% win rate (39/69) and PF = .96

> fading "down" gaps (i.e. going long) using a 6 pt stop: 63% win rate (22/35) and PF of 1.99.

I also added a filter to see if the prior day's direction made a difference and the only improvement was shown by only buying down gaps on the day of the Jobs report after a down day: 71% (10/14) and PF of 3.5.  This is a small sample size, but it is certainly worth considering.

So the next time there is a gap up on the day of the jobs report, you might want to think about trading in the direction of the gap - today it would have served you well (see below). Or better yet, you might just want to call it a day and start your weekend early!