Calm End to Tumultuous Year?
Fundamentals
Stock index futures are higher this morning, after upbeat earnings news from Oracle, RIMM and Nike after the bell yesterday. Today figures to be a choppy trading session, as it is quadruple witching, which tends to lead to more erratic trading. Also, there are no major economic releases or earnings reports that may give the market direction. It will be interesting to see if the market will be able to hold onto these gains after yesterday's sale of Citigroup stock at a discount to repay TARP funds. Citi, Bank of America, and Wells Fargo have all raised capital to repay government assistance. Traders initially viewed the event as a positive sign that the troubled lenders were on solid economic footing. They are now beginning to see that the $31 billion that the lenders had raised this month may simply be a way for the banks to rob Peter to pay Paul. Citi, in particular, did not seem ready to repay the Treasury, but was under pressure to do so after BoA announced the repayment of TARP funds. Yesterday's initial and continuing claims data was slightly worse than expected, but traders may discount the remaining data for the year and look forward to next year's data, as many employers are reluctant to shed jobs during the holiday season. The S&P has been trading in a very tight range for the past month and a half, and volatility remains at low levels. This may change when the market rings in the New Year, but the fundamental bias seems to be neutral or slightly bearish for the remainder of this year. There are no bearish fundamental indicators due to economic data, but the fact that stocks have rebounded so strongly during the course of this year may make equities subject to profit-taking pressure.
Trading Ideas
Given the lack of fresh fundamental news and indecision among traders, the fundamentals suggest the market may be in store for more range-bound trading. Likewise, the chart also points toward very subdued trading in the near-term. For these reasons, some traders may wish to take on a neutral strategy, such as selling a short strangle. An example of one such strangle could entail selling the January E-mini S&P1000 put (ESF01000P) and selling the January 1140 call (ESF01140C), for a credit of 10.00, or $500. The maximum profit is the initial credit, if the underlying March contract closes between the strikes on the January 15th expiration date. Remember, however, that the trade has unlimited loss potential, so some traders may wish to exit the position on a close through either of the strike prices.
Technicals
The March E-mini S&P chart shows very tight price action over the past month and a half. Generally, breakouts from these tight areas result in explosive moves. For the time being, however, the indicators suggest that the consolidation may continue between 1080 and 1120. The RSI is hovering near the 50 percent level, and the momentum indicator has been very close to the zero line. Like the chart itself, the oscillators are very benign and point to further range-bound trading.
Rob Kurzatkowski, Senior Commodity Analyst
