No Summer Break for Stock Index Futures Traders!
Fundamentals
Stock Index futures have shaken off the summer doldrums in July, with both a steep sell-off and sharp recovery having occurred this month. July started off with a thud, as the unemployment picture in the U.S. remains murky, with and additional loss of 467,000 jobs in June. Since the "official" start of the current recession, the number of unemployed has increased by 7.2 million and the unemployment rate has climbed by 4.6% to stand at 9.5%, with calls for the rate to reach double digits within the next few months. The loss of jobs in June was greater than expected by traders and was responsible for a week-long correction in the S&P futures market of just over 60 points. However, things began to look up for stocks this week, as stronger than expected readings for both consumer and producer prices took some of the deflationary fears out of the market, and a stronger than expected reading in the Empire State Manufacturing Survey gave some hope to traders that economic activity was beginning to rebound. On top of this seemingly "good economic news" was the start of the earnings season, with better than expected results from Intel and Alcoa putting traders in a buying mood and sparking a rally that has S&P futures back above where they were at the start of the month. Today we have options expiration for equity options, as well as options on the stock index futures, so traders should expect a potentially volatile session as traders scurry to close out or hedge their options positions before the close of trading -- although given the prices swings we have seen so far this month, today's option expiration may seem calm by comparison.
Trading Ideas
With the CBOE Volatility Index (VIX) near the lows of 2009 and signs that volatility may begin to increase, some traders of stock index futures may wish to investigate the purchase of straddles in the E-mini S&P 500 futures. A long straddle trade involves the purchase of a call option and a put option at the same strike price and month. An example of this trade would be buying the August E-mini S&P 500 925 straddle. With the September E-mini S&P trading at 925.50, the straddle could be purchased for 56.00 points, or $2800 per straddle. The premium paid would be the maximum risk on the trade, and the trade would be profitable if the September E-mini S&P is trading above 981.00 or below 869.00 at expiration in August. However, given the negative effects of time decay on a long straddle position, some traders may wish to exit the position before expiration -- especially if volatility increases sharply or if there is little movement in prices and expiration is less than two weeks away.
Technicals
Looking at the daily chart for the September E-mini S&P 500 futures, we notice the minor downtrend that started in mid-June ended abruptly with the sharp rally we saw at the start of the week. Prices are now above both the 20 and 100-day moving averages, and momentum has turned stronger. It was unusual to see the VIX rise on Thursday's sharp gains, and this may be a signal that the VIX may have become oversold and stock volatility may begin to rise. The 14-day RSI has turned positive, with a current reading of 59.41. The June highs of 953.00 should be the next resistance point for the September futures, with last week's low of 865.25 acting as support.
Mike Zarembski, Senior Commodity Analyst
