Market Unstressed
Fundamentals
Stock index futures are higher ahead of the Fed's release of bank stress test data. The cat has been out of the bag, as some information has been leaked by inside sources, and the indication is that Citigroup, Wells Fargo and Bank of America will require additional capital. It is no surprise that these banks would need more funding to continue operations, as they have all increased their leverage by acquiring other banks. The market, though, is focusing on the positive aspects of these early indications, which suggest that Goldman Sachs, JPMorgan Chase and Bank of New York will not need capital infusions to maintain operations. Treasury Secretary Geithner offered further reassurance by stating that the banking system is now in a position to weather the storm. In other market news, the ADP Employer Services report showed the job market in the US contracting by 491,000 jobs in the month of April, which is much lower that the forecast of 645,000 and the prior month's figure of 742,000. This could be seen as an early indication that the labor market may finally be bottoming out. If tomorrow's non-farm payroll data from the government comes in better than expected, it could offer reinforcement. Mortgage applications were up a seasonally adjusted rate of 2 percent for the week, while refinancing applications were up 1.2 percent. This comes on the heels of much better than expected construction spending and pending home sales data early this week and supports the view that housing may have hit a bottom, or, at the very least, be near a bottom. Barring a sharp jump in initial claims or negative stress test results, the market could build on the early gains in index futures.
Trading Ideas
Given the positive economic developments and minor technical breakthrough, some traders may wish to enter a conservative bullish options strategy. An example of one such strategy could be a bull call spread, buying the June E-mini S&P 975 call and selling a 1000 call for a debit of 7.50, or $375. The risk would be the initial investment, and the maximum profit potential 17.50 points, or $875, if the June contract closes above the 1000 mark on the June 19th expiration date.
Technicals
The June E-mini S&P has turned positive this week, after consolidating for the two prior weeks. Prices may test the January high close of 930.50 today, which can be seen as minor resistance. If the market is unable to close above the 930.50 market, prices could come back down to test newly established support at 866.75. The next area of solid resistance beyond 930.50 would come in just above the 1,000 mark. If the E-mini is able to close above this threshold, it would not only be positive technically, but it would be a huge psychological boost for traders.
Rob Kurzatkowski, Senior Commodity Analyst
