Stocks Move Higher, Momentum Slowing
Fundamentals
Stock index futures were higher for the sixth consecutive session, albeit only modestly so, despite the Fed's surprise decision to raise the discount rate last week. The move by the central bank can be seen as a positive for the economy as a whole, as the FOMC tends to err on the side of caution. The rate hike may mean US central bankers are fairly confident that the economy has formed a base it can build on. It will be interesting to see if stock traders will remain enthusiastic, as some market observers believe the Fed may have jumped the gun in its surprising move. Many believe that interest rates need to remain low in order for the economy to rebuild, and that inflation may continue to move forward at a snail's pace. The argument can also be made that inflation is a major concern for traders going forward, so the tightening of rates may be the appropriate action from the central bank. On the economic front, jobs remain the major concern among traders. During this long economic downturn, companies have learned to operate very lean, suggesting they may be tentative about hiring new workers. This presents a problem, and could create a vicious cycle of lack of jobs leading to a smaller bottom line, leading to fewer jobs, etc. Fed Chairman Bernanke is expected to touch on the discount rate decision, as well as possible changes to the Fed Funds rate and job growth when he testifies before Congress later this week. The market does seem a bit stretched at the moment, so some traders may be looking for positive reinforcement to keep the rally moving.
Trading Ideas
The fundamental outlook for equities remains extremely murky presently. A host of modestly better economic indicators seem to be overshadowed by the problems the labor market has been experiencing. The chart shows the recent rally finally beginning to lose some steam, but the strong bounce the market saw from the 1050 level could be a sign the future downside potential may be limited. Given the hefty option premiums and the uncertainty in the fundamental market outlook, some traders may look to enter into a short-sighted trade. If the market opens lower this morning, traders may wish to consider shorting the March E-mini S&P, with a protective stop at 1126 and a downside target of 1075. The exact risk/reward ratio cannot be determined, as we do not yet have an entry price.
Technicals
Turing to the chart, the March E-mini S&P has been rallying on light volume, suggesting some traders may be hesitant to buy into the rally. Yesterday's spinning top formation suggests that the chart may be favoring the downside in the near-term. Both the RSI and momentum indicators are showing bearish divergence from prices, suggesting that the oscillators also favor the downside. The inability of the market to move above the 50-day moving average could also be seen as favoring the bear camp.
Rob Kurzatkowski, Senior Commodity Analyst
