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How to prepare for the first huge number of 2014

Investors are preparing to digest a critical number on Friday, when the Bureau of Labor Statistics releases the December employment report. In addition to providing a widely watched check on the health of the economy, the report is likely to provide a clue for the Federal Reserve's next move.

"The jobs data, without a doubt, are absolutely critical," said Carl Riccadonna, senior U.S. economist at Deutsche Bank. "They are the most important data set to be watching in the near-term in regard to whether the Fed will hold steady or continue tapering."

The Fed announced in December that it would reduce the monthly pace of bond purchases in its quantitative easing program by $10 billion, largely on the strength of improving labor market data.

"In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of asset purchases," the Fed wrote in its December statement. The Fed also made it clear that it will monitor future jobs data to gauge how quickly it should taper the rest of its asset purchases.

The market will actually get more clarity on the Fed's thinking ahead of Friday's report. On Wednesday, the minutes from the Fed's December meeting will be released.

"I think they'll be very interesting minutes," Riccadonna said. After all, "it was the key Fed meeting of the year. And the focus is going to be: Is there any allusion toward future tapering measures? Are they starting to really get the ball rolling on tapering—or are they dipping their toe in the water and just watching what happens?"

Whatever the Fed minutes reveal, Peter Boockvar says investors can no longer afford to be as sanguine about economic indicators as they were in 2014.

"In 2013, all news was good news. The market rallied on both misses and beats on the nonfarm payrolls," said Boockvar, chief market analyst at the Lindsey Group. "But 2014 is going to be a different story. Now, a good number is just another step toward ending QE this year."

(Read more: The case for ditching stock—s and buying gold in 2014)

Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

When it comes to market reaction, "maybe the initial reaction to a strong jobs number is a rally, but at the end of the day, maybe not, if people realize we have to deal with a further taper," Boockvar told CNBC.com.

For Jim Iuorio of TJM Institutional Services, the risk in equities is to the downside. He highlights a situation in which the nonfarm payrolls number is weaker than the 190,000 anticipated, but not atrocious.

"We're already expecting really good data, so I think the potential now is for some disappointment next week," Iuorio said. "I think the jobs report would have to be really awful for the Fed to change their mind on tapering. A slight miss does not do anything for the notion of a taper, but a slight miss could spook markets a bit."

(Read more: 2014 may be the year the job market sees real improvement)

To position for this scenario, Iuorio recommends buying Treasurys and shorting stocks

"I think the 10-year notes could rally, and yields could go down to about 2.92" percent, Iuorio said. "And I think stocks could sell off to the low 1800s."

But Anthony Grisanti of GRZ Energy says this is no time to be short.

"We have our first full trading week in the last few weeks, so I'm looking for traders to come back to their desks, put some of that money that's been on the sidelines in '13 to work in '14," Grisanti said. "And I think we're going to have good numbers coming out this week – especially that jobs number. So I'm looking to get long the S&P e-mini."

—By CNBC's Alex Rosenberg. Follow him on Twitter: @C NBCAlex.

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