Stock index futures are lower once again this morning, as the feel-good atmosphere surrounding the US and global economies continues to give way to an aura of uncertainty. News that China's manufacturing grew at a slower pace than expected set the tone for the markets overnight. The downgrade of Spain's government debt has also set a negative tone for the market, despite the expectations of many observers that this likely would happen. Some traders also remain extremely skeptical of the ECB tender because it does not solve the fundamental problem facing Europe, which is rampant government overspending. Some traders are looking at the parallels between the problems facing Europe and our current situation in the States. The government has spent well above its means to stimulate the economy, which has only provided a sugar high, and now the nation is saddled with a mountain of debt not seen since World War II. The public sector has contributed in adding jobs during the recovery from the financial shock of 2008, but it is unlikely to keep creating jobs at its current pace. Consumers could be extremely tight with their pocketbooks in this type of environment, making times difficult for retailers and manufacturers. The first week of the month brings with it the trifecta of employment data.. Yesterday's ADP number showed far fewer jobs created that analysts had expected, setting the bar low for today's initial and continuing claims numbers and tomorrow's non-farm payroll number. Barring a positive surprise, the markets could find it difficult to gain traction.
The idea that the economy may not be as healthy as many had hoped has been in the back of traders' minds for quite some time. Now, some fundamental flaws have been pushed to the forefront. Even the President and Vice President have recently conceded that job growth is not at a level that they would like to see. The breakdown on the chart will likely add market technicians to the list of skeptics. Some traders may wish to consider employing a bearish strategy, such as a bear put spread -- for example, buying the August E-mini S&P 1000 puts (ESQ01000P) and selling the August 975 puts (ESQ0975P) for a debit of 6.50, or $325. The trade risks its intial cost for a profit potential of $925 if the underlying September futures contract closes below 975 at expiration.
Turning to the chart, we see the September E-mini S&P trading below fairly significant support at the 1050 level. This could be a sign that the market may be ready to test critical support at 1000. The 1000 level is not only a technical support level, but a key psychological mark akin to the Dow 10,000 level. Failure to hold here could be a sign that the market trend could turn down. In order to find some stability, the September contract would likely have to cross the 1050 or even 1100 levels. The downward crossover of the 50 and 100-day moving averages could be seen as a negative sign over the intermediate-term. The 14-day RSI has reached oversold levels. This, coupled with some bullish divergence between momentum and RSI, indicates the market may find some footing in the short-term.
Robert Kurzatkowski, Senior Commodity Analyst