Data Heavy Wednesday
Fundamentals
Stock futures are higher ahead of the GDP report this morning, which is expected to show the economy shrinking at a slower pace than the previous quarter. While the consensus estimate is a decline of 4.7 percent, the range of estimates varies widely. In addition to the GDP release, earnings season is in full swing and the FOMC will release their rate decision, which points to a volatile day of trading. Traders will listen closely to what the Fed has to say about the economy, as the central bank is not expected to change their current interest rate policy. The Fed will probably give a very neutral statement today, citing positive economic developments, while also hedging the optimism with risks facing the US, in order to not upset the markets. The GDP data will probably determine the market's direction for the day, and the FOMC statement will probably not change the market's direction unless they unveil a bombshell. Outside of today's economic data releases, the market will focus on the stress tests facing major banks. Despite better than expected earnings data from banks in recent weeks, there are indications that Citigroup and Bank of America will need additional cash infusions. Preliminary reports from the Fed indicate that 6 of the 19 largest US banks will need cash to remain solvent. The cash infusions from the government are expected to come via convertible preferred stock instead of government assistance, which presents the market with a unique predicament. On one hand, the political upheaval is lessened by taking an equity stake, but the flip side of the coin is that convertible preferred stock dilutes shareholder value. The swine flu fears may limit upward movement of the market until the outbreak is contained. The reports of the virus have spread to several states, indicating that worries may continue to linger.
Trading Ideas
Given the lack of direction of the market, neutral traders may choose to employ a strangle strategy by selling the May Mini Down 7400 put and selling the May 8400 call for a credit of 120 point, or $600. Since the potential loss of the strategy is unlimited, some traders may want to consider also buying a long strangle to hedge the risk of the trade and buy a May 7200 put and a May 8600 call for a debit of 50 points, or $250. This would limit the potential loss of the strategy to 200 points, minus the credit.
Technicals
The June Mini Dow futures chart shows the recent rally in equities stalling, suggesting the market may be entering a sideways channel. Failure of the market to solidly trade through the 8000 level has been disappointing for the bull camp, while the fact that the market continues to linger around 8000 and not break down is disappointing for the bear camp. Prices continue to trade around the 100-day moving average. Both momentum and RSI remain neutral.
