Maybe It's Not So Bad After All?
Fundamentals
The month of May was particularly hard on equity bulls, when the Emini S&P 500 futures fell by almost 100 points as the European debt crisis, the oil spill in the Gulf, and the Chinese government's attempts to put the brakes on its surging economy struck fear in the minds of some investors and caused a stampede out of the market. Equity futures were not the only sector affected by this "risk-averse" mentality, as positions in energies, grains, and metals were also liquidated, with the main beneficiaries being U.S. Treasuries and Dollars. Now that June has arrived, we are starting to see some positive economic data out of the U.S. that has, at least for now, slowed down the selling. On Thursday, the Institute of Supply Management's (ISM) non-manufacturing index came in at 55.4 for May. Readings over 50 show expansion and signal improvement in businesses that make up the vast majority of the U.S. economy. In addition, jobless claims fell by 10,000 for the week ending May 29th, which is above analysts' expectation for decline of 5,000. The always highly anticipated non-farm payrolls report is scheduled to be released at 7:30 am Chicago time today, and traders are looking for a gain of over 500,000 jobs in May. This figure will include the temporary hiring by the government of census workers, but private business hiring is also expected to show a gain of nearly 175,000 jobs last month. Should today's data beat the pre-report estimates, it could be the catalyst to get traders' mindset back to the glass being half-full instead of half empty, as they viewed it in May.
Trading Ideas
With the CBOE's Volatility Index still reading over 30 as of this writing, there is still some "fear" premium in option pricing in stock index futures options. Traders expecting volatility to decrease in the next few weeks could choose to explore trading opportunities in Emini S&P futures options that would benefit from a drop in volatility. An example of this type of trade would be selling a strangle in the June Emini S&P 500 options, such as selling the June Emini 1175 calls in combination with selling the June Emini 950 puts. With the June futures trading at 1095.50 as of this writing, this strangle could be sold for 2.75 points, or $137.50 per spread, not including commissions. The premium received would be the maximum potential profit on the trade and would be realized if the June Emini settlement price is below 1175 and above 950 at option expiration the third Friday in June. Given the risk involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such strategy would be to close out the trade before expiration if the option premium on the strangle rises by 3 times the amount of premium received for originally selling the spread.
Technicals
Looking at the daily continuation chart for Emini S&P 500 futures, we notice that from the March of 2009 lows through the recent highs made in late April, the sell-off in May has not even reached the 38.2% Fibonacci retracement level. So given the perspective of how far we rallied from the recent lows, the current sell-off has been relatively minor so far. Prices have fallen below both the 20 and 100-day moving averages, although the 20-day MA is currently being tested once again. The 14-day RSI has moved up from oversold levels with a current reading of 44.96. Bulls will need to see the May 25th low of 1036.75 hold in order to re-exert control and set-up a potential test of the next major resistance point near the 1175.00 area.
Mike Zarembski Senior Commodity Analyst
