"Santa Claus" Rally in the Cards for 2011?
Friday, December 2, 2011
Some traders who are looking for a stock market rally to be under their trees this year may want to consider exploring bullish trading strategies using E-mini futures options. For example, with the March E-mini trading at 1234.25 as of this writing, the January 1275 calls could be bought and the January 1325 calls sold for a net debit of 16.00, or $800, not including commissions. This bull call spread has a maximum potential risk of the entire investment in the spread, with a maximum potential gain of $2,500 minus the premium paid which would be realized at option expiration in January should the March futures be trading above 1325.00.
Fundamentals
Equity bulls received an early present on Wednesday, as the S&P futures rose by over 4% after a group of major Central Banks, including the Federal Reserve, helped to elevate any potential liquidity issues in the overnight loan market by enacting a temporary currency swap program to help lower borrowing costs for banks and other financial firms. This program will allow the Fed to loan U.S. Dollars to other Central Banks in exchange for collateral in other currencies. This was done to help elevate tight credit conditions, especially for European banks, that needed funding in Dollars, as many participants were hesitant to loan Dollars given the continued saga of the European debt crisis. In addition, the stock market got a boost from China, where the government announced a reduction in the reserve requirements for Chinese banks to 21%, vs. 21.5% prior. The private employment estimate from ADP also was a nice surprise, as the large processer of payroll checks reported that private sector payrolls rose by 206,000 last month - which was well above analysts' estimates of a 130,000 job increase. The increased liquidity entering the global markets combined with what may be an improving employment outlook in the U.S. could help send equity prices higher to end 2011, especially with many fund managers underperforming their benchmarks for the year who may be forced back into the equity markets in force to avoid falling further behind their performance goals. All eyes will be on this morning's Non-farm Payrolls report for November, with the consensus calling for a gain of 123,000 jobs last month. The unemployment rate is expected to remain steady at 9.0%. Should we see another positive surprise in this month's payrolls figure, it may give further support that a "Santa Claus" rally might be under traders' trees this holiday season.
Technical Notes
Looking at the daily continuation chart for the E-mini S&P 500, we notice what may turn out to be a "bull flag" pattern forming. Applying Fibonacci retracement to the chart starting at the major low formed on October 4th, we notice that the rally from this low and the subsequent correction fell to a nearly perfect 61.8% retracement of the rally! Since then, prices have recovered back to just above the 23.6% retracement and are currently testing the top of the bull flag trendline. A close above this trendline sets up a potential test of resistance at the 10/27 high of 1289.25, with support seen at the November 25th low of 1147.50
Mike Zarembski, Senior Commodity Analyst
