First Test Of '09: 1 Week Away

How well will the stock market digest bad news this year? The big test is only a few days away.

Wall Street began the new year optimistically. On Friday investors brushed off a weaker-than-expected report on manufacturing and sent stocks higher.

It was interesting to see that the market wasn't spooked by the Institute for Supply Management's report that manufacturing activity index fell to the lowest level in 28 years in December.

The Street's cool reaction extends a pattern that began to emerge after the market touched multiyear lows on Nov. 20.

But that’s small potatoes compared to what lies ahead. In fact the big test is exactly a week away.

What Lies Ahead

On Friday January 9th we hear the December jobs number and the data is not expected to be good. "We could see a nonfarm payrolls loss of more than 460,000,” says Mike Darda, MKM Partners chief economist. If he’s right that could push the unemployment rate to 7%.

Remember employers axed payrolls by a shocking 533,000 in November, reporting the weakest performance in 34 years. Can the market continue to rise if faced with such devastating news, month after month?

Darda thinks it can. “The markets are forward looking and the jobs data is backward looking.” However he cautions it’s going to be a bump ride.

"There is some goods news. The Libor rate has collapsed," he adds. "But we’re far from normal and “I think it’s going to be tough sledding for a while.”

Darda expects stocks to re-test their lows sometime in the first half of ’09. As a result he recommends that investors, “stay conservative” and look at corporate bonds, munis, TIPS, or gold over the next 6 months.

If you must invest in stocks Darda thinks infrastructure plays may stand to benefit from Obama's stimulus plan.

The Currency Trade

And if you’re looking to trade currency, the economic outlook is probably bearish for the dollar.

With interest rates already hovering near zero there’s already reduced demand for the U.S. currency. That combined with the expected losses in jobs and "it's unlikely that people will get too enthusiastic about holding dollars," says Michael Woolfolk, senior currency strategist at The Bank of New York-Mellon in New York.

Last year, the dollar rose about 6 percent against a basket of major currencies, its best performance since 2005, because investors saw it as the ultimate safe haven in the worldwide financial crisis.

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Trader disclosure: On Jan 2, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders:Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE): Macke Owns (MCD), (WMT), (TM), (DIS): Kinahan Owns (DELL), (GE), (HD), (HPQ), (INTC), (LEHMQ), (C ), (YHOO): Kinahan Is Short (BAC) Puts, (CSCO) Puts, (MSFT) Puts

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