Stock Indices in for a Choppy Ride Ahead of Mid-Term Elections and FOMC Meeting
Fundamentals
S&P 500 futures have been in a bull market run since September, with the December futures having gained just over 140 points the past two months. The rise in equities has correlated with weakness in the U.S. Dollar, which the equities market apparently considers a bullish factor, with the hope being that a weak Dollar will boost exports of U.S. goods. However, the past few trading sessions have seen increased choppiness in the major stock indices, as traders begin to pare back their positions ahead of two major events next week -- the U.S. mid-term elections on Tuesday and the end of the November FOMC meeting on Wednesday. Not even a much better than expected weekly jobless claims report (down 21,000 to 434,000 the week ending October 23rd) could shake the liquidation mode of traders going into the weekend. The biggest concern of stock bulls seems to be pared back expectations for the size of any quantitative easing by the Federal Reserve. Many analysts believe the stock market has already priced-in a huge "easing" attempt by the Fed, which stands to disappoint the market should a more tempered approach be in the cards. In addition, current polls suggest the Republicans are favored to regain control of the House of Representatives, but may fall just short of capturing control of the Senate, and the potential for gridlock in the legislature is high. Those watching the VIX will notice a bit of a spike in the index the past few days, which can be viewed as a sign of investors' nervousness going into next week.
Trading Ideas
With volatility moving higher ahead of next week's important events, a contrary strategy would be to sell into this heightened volatility, with the expectations that it will fall once the election results and the FOMC meeting statements are out. An example of such a trade would be to sell a strangle in E-mini S&P 500 futures options. An example of such a trade would be selling the November E-mini S&P 1240 calls, as well as selling the November 1070 puts. With the December futures trading at 1178.00 as of this writing, the strangle could be sold for about 4.75 points, or $237.50 before commissions. The premium received would be the maximum potential gain on the trade and would be realized if the December futures are trading above 1070.00 or below 1240.00 at option expiration on the third Friday in November. Given the risk involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such exit strategy could be to buy back the short options prior to expiration should the strangle trade at a premium of 2.5 times the amount originally received for selling the strangle originally.
Technicals
Looking at the daily continuation chart for the E-mini S&P 500 futures, we notice prices remaining above the 20-day moving average, but the slope of the current uptrend is starting to turn sideways. The 14-day RSI has moved below overbought levels, with a current reading of 66.27. Bullish traders would need to see a close above resistance at the recent high of 1193.00 to set-up a potential test of the April high of 1216.75. Should support at the 20-day moving average, which is currently near the 1168.00 area fail to hold, this could set-up a test of the 200-day moving average near the 1120.00 area.
Mike Zarembski, Senior Commodity Analyst
