A bad jobs report could be scary

Friday is a worry for the stock market. So, pay attention.

It's a worry because the June report on unemployment and payroll employment comes out at 8:30 a.m. ET, and investors already are turned off by stocks.

If they don't like the jobs report, what  stocks they haven't sold they'll just dump on the market before they head to the beach for the July 4 weekend. Markets will be closed on Monday.

Price won't matter.

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If the report is decent (and we'll get to that in a minute), the market may have a small rally.

When the market is tumbling, Fridays become very vulnerable because money managers and other investors typically protect themselves by squaring their positions. That way, they don't get caught on Monday if the Asian and European markets weaken.

This occurred even last year when the market was rising, and the last trading day before a long holiday weekend doesn't give you a pass from trouble.

• Jim Jubak: What will stop the market carnage?

The Dow Jones industrials ($INDU) fell 223 points on July 2, 2009, ahead of the long weekend. On Aug. 29, 2008, the Friday  before Labor Day 2008, the Dow fell 172 points. The Lehman Bros. collapse came two weeks later, setting off the 2008 market crash.

At the same time, the condition of the market is vulnerable. The Dow is down 12.8% from the April 23 peak, with the Standard & Poor's 500 Index ($INX) off 15.3% and the Nasdaq Composite Index ($COMPX) down 16.6%. That suggests a bear market -- defined as a break of 20% or more from a recent high -- could be in the cards.

Worse, the major averages are displaying head-and-shoulders patterns, which suggest the market could go lower. A weak jobs report could cause a major spark.

• Check this S&P 500 chart to see the pattern

And, as we know, the economy appears to be stalling. Housing starts in May were weak; new-home sales were the worst since record-keeping began in 1963.

The jobless rate in May was 9.7%, down slightly from April's 9.9% and above 9% for a 13th straight month. Since 1948, this is the second-longest monthly streak where the unemployment rate has topped 9%. The longest: the 19 months between March 1982 and September 1983.

Worse, the Democrats are having problems getting an extension of jobless benefits passed. No one is talking about a new jobs program.

Austerity is the new fashion word in Washington, although the debate about whether austerity is a good idea when the economy is struggling to break is loud. It will get much louder if the jobless report is weak.

For a solid discussion of the debate, check this New York Times article by David Leonhardt.

So, here's how to judge whether Friday's jobs report is good or bad:

The unemployment rate. If it falls, that's good. If it's steady but more people are looking for jobs, that's not so bad. That means people see jobs coming and are starting to look.

Payroll employment. First, ignore the overall number. It will show a big decline because the Census Bureau is shedding all the workers it hired to do the 2010 census. Instead, look at private employment. It rose 16,000 in January, 62,000 in February, 158,000 in March, 218,000 in April. Then, the May number came in at just 41,000 when the report was released on June 3, and the Dow dropped 323 points.

Hours worked. This is also a critical number because if it's rising, it means employers have more work to do. And a rising trend ultimately translates into job hiring. In December 2006, when the housing boom was in full swing, the average workweek hit 34.8 hours. By October 2009, the average week had fallen to 33.7 hours. That reflected the wave of employers who pushed full-time workers to part time or demanded workers take a week off without pay. For more of 2010, it's been back above 34 hours. If it shows more growth, that's a very good number.