Employment Enigma
Fundamentals
Stock index futures are lower this morning ahead of the Non-Farm Payroll report, which is expected to show the economy losing 325,000 jobs for the month of July. The unemployment rate is expected to climb to 9.7 percent. While this figure is expected to show further contraction in the labor market, the payroll number has steadily improved since January, when the report showed a loss of over 700,000 jobs. Employment data remains the unknown variable in the recovery equation, with some analysts expecting a jobless recovery and others forecasting that labor conditions will eventually right themselves during the recovery. What both parties can agree on is the fact that any rebound in economic conditions must be accompanied by increased employment in order to sustain itself or risk falling back into recessionary conditions, as this would prevent the housing market and consumer spending from returning to healthy levels.
Stocks have been riding a wave of enthusiasm for the past month. Construction and housing have shown some signs of life after lackluster data in June. This has caused the financial sector to perform particularly well because of optimism that the lending market may improve, yet traders have to wonder how much of the gains in financials has been driven by short-covering by short sellers that have run out of patience. The high unemployment rate may cause the foreclosure rate to remain very high, and the refinancing boom will only last as long as interest rates remain low. Technology has been another sector that has performed particularly well without concrete data that sales of consumer electronics and other discretionary items will increase anytime soon. The high cost of fuel may hurt the technology sector, in particular, because consumers may clamp-down on discretionary spending.
Trading Ideas
Given the shaky fundamental footing, some traders may be looking for a pullback in equity prices. Even some long-term bullish traders may be looking for the market to come down and test the 950.00 level, which was never tested after the breakout. Therefore, some traders may wish to consider entering into a bear put spread. For example, buying the September 985 put (ESU9985P) and selling the September 965 put (ESU9965P) for a debit of 7.00, or $350. The maximum risk is the initial cost of the spread and the maximum profit is $650 if the September E-mini S&P closes below 965.00 at expiration.
Technicals
Turning to the chart, the September E-mini S&P futures continue to trade near the key psychological and technical resistance area at 1,000. In order for the market to make further gains, prices must advance through this area with conviction. Near-term, the market must hold the 950 level in order to maintain its upward momentum. Both the RSI and slow stochastic indicators show overbought conditions, suggesting the market may come under some near-term selling pressure. It is interesting to note that the RSI indicator has shown bearish divergence from the price of the underlying futures contract.
Rob Kurzatkowski, Senior Commodity Analyst
