Little for the S&P to Latch Onto
Trading Ideas
Equity prices have been in steady decline for over a month, but it has been a slow grind as opposed to a steep sell-off. Pessimism has begun to set in among equity traders, who have found little positive news to latch onto at the present time. The closes below the 1300 level can be seen as a technical setback. Despite these declines, the VIX index has not moved sharply higher, indicating little volatility premium built into the market. Some traders may wish to consider entering into a trade that would benefit from both price declines and volatility increases, such as a bear put spread. For example, some traders may possibly wish to buy the June S&P 1275 put and sell the 1250 put for a debit of 5.00, or $250. The trade risks the initial cost and has a maximum profit of $1,000 if the June futures settle below 1250. Since this is a quarterly S&P expiration, traders are not subject to exercise risk, as both the futures and options settle to cash.
Fundamentals
S&P futures have rebounded slightly this morning, following rallies in UK stocks. The stock market has been grinding lower at a slow pace since peaking in late April on the heels of weaker economic data. The job market has given investors very little to be confident about in recent reports. Last Friday's Non-Farm Payrolls number only showed the economy adding half of the number of jobs that most traders had expected. Delving deeper into the numbers, it appears that McDonald's restaurants accounted for half of the job increases. The anemic job growth has investors concerned that the housing market may be on even weaker footing that previously expected. This is cause for concern for banks, as well as the economy as a whole. Many economic observers are suggesting that the US is heading towards a double-dip recession. It is a bit early to make that bold of an assessment at this point, but there is enough concern out there to have a negative impact on prices. The economy is, however, more likely to see an extended period of slow or flat economic growth, rather than another recession at this point. It is not all doom and gloom at this time. We have seen a bevy of IPO's of late, many of which are Web 2.0 companies. This shows that some companies are still confident that they will get a fair price on their offering. A devil's advocate could make the argument that new public companies may not be able to fetch a reasonable price if the stock market was to turn negative, so these companies are rushing to go public because they are not confident that they will get the same valuation down the road.
Technical Notes
Turning to the chart, we see the June E-mini S&P trading below key technical and psychological support at the 1300 mark. This suggests that prices could test the 1250 level on the downside. Beyond 1250, additional support comes in near 1225 and, more importantly, 1175. The index is also trading below the 100-day moving average, a significant technical blow for the market. The last time the S&P traded below the 100-day MA was in September of last year.
Rob Kurzatkowski, Senior Commodity Analyst
