Three Reasons the Market Will Fall on Friday

by Andrew Zatlin January 31, 2023 1:45 pm ET

Typically, Fridays are a cause for celebration.

Not this Friday, though.

In three days, I'm expecting a sharp market pullback.

Let me tell you why... and reveal what you can do about it.

For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.

Three Reasons the Market Will Fall on Friday

I hate to put a damper on your weekend, but this Friday the stock market is going to drop.

I've got three reasons why it's bound to happen, one of which is particularly important...

But all three enable us to get positioned for a terrific investment opportunity.

Reason No. 1

Let's start with reason No. 1: an ease in buying pressure.

You see, we're nearly halfway through earnings season. And as this season continues to be a disappointment across the board, there's less pressure to buy into the market.

In fact, the interest in selling is heating up. Speaking of selling interest...

Reason No. 2

The second reason centers around short selling.

As a reminder, short sellers are investors who bet the price of a stock will decline. As you can see by this chart, when interest in shorting stocks falls, the stock market rises:What's going on here? Well, if you're on the wrong side of a bet (i.e., if you bet against a stock but its price unexpectedly jumps higher), you'll want to close your position quickly. So if you're selling stocks and losing money, you'll need to turn around and buy those same stocks.

This ends up driving the price of the stock even higher, creating what's known as a short squeeze.

Short squeezes create massive buying pressure. And we recently experienced one, which drove the market up.

Right now, though, we're at the tail end of this event, so the pressure to buy has largely faded.

So, we have two reasons why there's less money coming into the market. Now let's talk about why money will soon be flowing out of the markets...

Reason No. 3

On Friday, payroll numbers come out. And if they're strong, the market is going to fall.

Remember, we're in a time where bad news is actually good news, and vice versa.

In this case, strong payroll figures (which suggest a strong economy) gives the Fed every excuse to raise interest rates again. And that's the exact opposite of what the market wants to see.

I think we're going to see a very strong number. And here's why:

This chart shows you January payroll numbers in each of the last 20 years. Historically, there's a big hiring push toward the end of the year to account for the holidays, followed by massive layoffs in January. Almost two and a half million people get laid off to start each year.

As a result, there's a seasonal adjustment, which in this case, attempts to measure and predict how unemployment will change from month to month.

This year, though, is different. And it's why the market is going to misread the situation. Let me explain...

Where the Market Is Getting It Wrong

Imagine you own a nightclub. Every Friday and Saturday night, it's packed, and you staff 50 employees to handle the crowd. Mondays, meanwhile, are slower. You only need 20 employees working on those days.

In this scenario, comparing Fridays to Mondays doesn't make sense. Yet that's what the seasonal adjustment does. It compares business on Friday to business on Monday, instead of comparing the most recent Friday to other Fridays.

And here's what's interesting:

This year, business at your nightclub has been slower overall. So on Fridays, you've only been staffing 40 people, compared to 50 (but still 20 on the weekdays).

Well, instead of having to reduce your workforce starting from 50, now you're starting from 40. And in this insane, "Alice in Wonderland" type of logic, this is a good sign according to the payroll data.

In other words, you're having to fire fewer people, but that's only because you hired fewer of them in the first place!

Our Opportunity

The key takeaway is this: Good news is bad news.

If a payroll number comes out that's stronger than expected, the market is not going to like it...

Even though the strength of this number isn't real. You and I understand this, but the market doesn't.

I believe the market is going to get surprised. Then it's going to misinterpret this data...

Revealing an opportunity for investors like us. If you're a Moneyball "Pro" subscriber, I'll reveal one of my favorite ways to take advantage of the market's upcoming folly...

A play that could help you more than double your money.

In the meantime, we're in it to win it. Zatlin out.