Stock index futures look to end the month of August on a weak note, as a global sell-off in equities spreads to the U.S. In China, the benchmark Shanghai Index fell by 6.7 percent yesterday, as traders fear that tightening credit will put the brakes on the country's expanding economy. The sell-off sent share prices in China down over 20% since August 4th and has many traders believing that Chinese indices may have entered a bear market phase. Obviously things are much better for U.S. stock indices, with the S&P 500 down only slightly from its highest point of 2009. However, September has historically never been kind to equities, and many traders believe we may see a correction in U.S. share prices this fall, as professional traders come back from their summer holidays and trading volume improves from its doldrums. The direction the indices may take could be determined by the slew of economic data coming out to start the month, including reports on existing home sales, factory orders, jobless claims, and the always important non-farm payrolls data for August. Current estimates for U.S. payrolls are for a decline of around 225,000 jobs in August, slightly better than the 247,000 decline in July. The unemployment rate is expected to increase by 0.1% to 9.5% after the surprising 0.2% decline seen in July. If this week's economic data can help confirm that the worst of the recession is behind is, then equities may continue their stunning recovery. If not, the market's reaction in China may be an omen of a challenging fall for traders.
Given the potential for volatility to increase in September, especially with the unemployment report looming, some traders may wish to consider initiating positions that will benefit from an increase in volatility. An example of such a trade using futures options would be buying a straddle. A long straddle involves buying a call option and buying a put option at the same strike price in the same month. For instance, buying the September E-mini S&P 500 1015 straddle. With the September futures trading at 1015, the straddle could be purchased for 23.50 points, or $1,175 per straddle before commissions. The premium paid would be the maximum loss on the trade. Since this trade has less than 3 weeks to expiration, more risk averse traders may wish to consider closing out the trade early if the position loses half its value before expiration.
Looking at the daily chart for September E-mini S&P 500 futures, we notice the market holding just above the 20-day moving average. The last time prices fell below the 20-day MA was on August 17th, and prices rebounded the following day. We are showing a bearish divergence in the 14-day RSI, as the highs made on Friday in the ESU9 did not correspond with a new high reading in the RSI. This may be a sign that buying momentum is beginning to wane and a correction in prices is due. 1038.75 is seen as resistance for the September contract, with support found at 975.50.
Mike Zarembski, Senior Commodity Analyst