Can it be a Bull Market if No One is Buying?
Fundamentals
The classic trading mantra "The trend is your friend" certainly describes the behavior of the U.S. Stock indices since March of last year, with the S&P 500 reaching highs not seen since the end of September 2008. The latest fuel to rocket stock prices higher was the "non-action" by the Federal Reserve after their latest FOMC meeting on Tuesday. In their post-meeting statement, Fed officials noted that the U.S economy is improving, but that current economic conditions and tame inflation catalysts warranted keeping interest rates at an exceptionally low level for an "extended" period of time. This statement was similar to the January statement and alleviated some of the concerns that the Fed would be moving to raise interest rates sooner than previously thought. This announcement should make equity investments attractive, as raising interest rates too soon during an economic recovery could hurt businesses trying to recover from the economic downturn. Although it is not too surprising that we have seen a stock market recovery since the lows were made in March of last year, the real conundrum for technical traders is the relatively low trading volume seen during the rally. Normally, technical traders would like to see volume increasing in the direction of the trend, as confirmation of the validity of the trend. However, even though the stock indices have been making new highs, volume has been anything but robust. In fact, it seems that volume has actually increased during the brief market corrections we have seen this past 12 months, sending confusing signals to traders and market analysts alike. One possible answer to this phenomenon is the rise of automated trading programs that now account for a large percentage of the markets' volume. Given the higher volatility seen on major down moves, it is not surprising that these automated algorithms would produce higher volume during more volatile trading action. What seems to be missing from the market rally is the participation of the individual investor, who it appears, has missed most of the rally so far, as the long-awaited price corrections in the stock indices never really materialized, and investors have become a bit gun-shy chasing the market as it continues to make new recovery highs. It is certainly possible that the highs in the indices will not be seen until the public finally returns to the market, at which point we could see the major indices finally stage a pullback, which will be of little use for those investors who have joined the bullish party late.
Trading Ideas
Although the nearly yearlong rally in the E-mini S&P 500 futures has shown little signs of abating, the possibility of a correction continues to loom -- especially given the lackluster volume seen. One way to play a move in the market without favoring one direction or the other would be to buy strangles in the E-mini S&P futures options. An example of this trade would be buying the April E-mini 1165 calls and the April 1150 puts. With the June E-mini S&P trading at 1158.75 as of this writing, this strangle could be purchased for about 21.50 points, or $1,075, not including commissions. The premium paid would be the maximum risk on the trade, and the trade would be profitable at expiration in April if the June E-mini is trading above 1186.50 or below 1128.50.
Technicals
Looking at the daily continuation chart for the E-mini S&P futures for the past 2-years, we notice since the highs were made back in May 2008 all the way to the lows of March 2009, the index has rallied back past the 61.8% Fibonacci level. The market is well above both the 100 and 200-day moving averages, and the up-trend line drawn from the March lows does not come into play until the 1089.00 area. The 14-day RSI has moved into overbought territory, with a current reading of 72.94. The next major resistance point is seen at the psychologically important 1200.00 level, with support seen at the recent lows at 1054.00.
Mike Zarembski , Senior Commodity Analyst
