Jobs Report Could Add More Fuel to Stock Rally

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A job seeker searches for opportunities at an Illinois Employment and Training Center.

Investors looking for any reason to buy stocks are hoping to find one Friday when the government releases its monthly jobs report.

While a reliable rally killer for much of 2012, the release of the nonfarm payrolls data has proved positive for the market this year, with the Standard & Poor's 500 picking up 7 points on both the January and February release dates.

With indications that the report on February's trends could be better than initial expectations, that likely would provide the stock market another upside catalyst.

(Read More: Jobs Market Gets Better; Trade Deficit Gets Worse)

"We're certainly in an environment where good news is great and bad news is just OK," said Art Hogan, managing director and head of product strategy at Lazard Capital Markets. "The market has just found the path of least resistance to the upside in the near term and it's hard to find something to knock it off there."

Economists surveyed by Reuters are expecting the Bureau of Labor Statistics to report the economy created 160,000 jobs and the unemployment rate steadied at 7.9 percent.

However, a report from ADP and Moody's Analytics on Wednesday that showed private payrolls increased by 198,000 for the month has caused some in the market to raise their forecasts.

The unexpected high number "capped a string of decent employment data, including jobless claims, jobs plentiful and the ISM employment subcomponents, which indicated that hiring momentum held up last month," said Joe LaVorgna, chief U.S. economist at Deutsche Bank.

(Read More: Private Jobs Continue to Show Signs of Growth)

As a result, LaVorgna took his initial projection of just 125,000 net new jobs all the way up to an above-consensus 180,000.

"We remain cautious that there may be a weather impact on hiring due to the Northeast snowstorm in the survey week, but the resilience in the (ADP report) suggests it may be less than we originally anticipated," he said.

Indeed, it's always dangerous to set expectations too high for an economy growing at just 0.1 percent while the Dow Jones industrial average stock market index has hit a succession of record highs.

In fact, Standard & Poor's Capital IQ on Wednesday warned investors to start taking some money off the table in advance of an expected market drop.

Retail investors pulled money out of U.S. stocks last week for the first time this year, with the Investment Company Institute reporting that mutual funds focusing on U.S. stocks saw outflows of $1.13 billion.

Though long-term bullish, S&P warned the market is hitting some bearish technical levels.

(Read More: Dow Breaks Record but Party Likely Won't Last)

"A large number of sentiment indicators are now showing high levels of optimism, another warning sign, in our view," Mark Arbeter, S&P's chief technical analyst, said in a note to clients. "A pullback, in our opinion, would reset sentiment back to more comfortable levels, allowing for the potential of one more rally."

Such a pullback would need a catalyst, which a disappointing jobs number could provide.

Citigroup economist Robert DiClemente for one, held to his original forecast of just 150,000 new jobs, despite the private sector surprise.

Nomura's Ellen Zentner maintained an above-consensus forecast of 175,000 but noted that the market, because of the ADP report, probably will look for something closer to 190,000-200,000.

Zentner said a letdown could come both from the February weather disruptions as well as an overestimation from ADP on its estimate of 45,000 jobs in the trade industry.

Paul Dales at Capital Economcs also sees a 175,000 count on the nonfarm payrolls number but warned that the picture going forward could be shaky because of a generally weak outlook on corporate earnings.

The jobs picture also is likely to get pressure from the government itself, which will be cutting positions in the wake of mandatory spending cuts recently put into place as the result of the sequestration impasse among Washington political leaders.

"The headline (jobs) number may not be enough of a surprise" for the market, Hogan said. "What you're going to see is a continuation of government being a drag on the numbers."

—By CNBC's Jeff Cox. Follow him on Twitter at @JeffCoxCNBCcom.