Sometimes it is good to go with the flow. Other times it makes sense to go against the consensus opinion. Always remember to calculate your risk upon diving in the water. Sometimes salmon make it all the way upstream and sometimes they run into bears.

If you would have told me on December 31, 2012 that the S&P 500 would be up nearly 10% in the early part of the second quarter, I believe I would have made a few assumptions. I would assume that the unemployment rate had drifted near 5%. I would have also guessed that that the economy gained 200,000 jobs on a monthly basis. Also, there would have needed to be a recovery on the housing sector, or at least stabilized pricing in many sectors. If you are a follower of the markets or the U.S. economy, you are aware that all of those assumptions are incorrect. In spite of that, the S&P 500 is up nearly 10% from the start of the year.

TWO FACTORS AT PLAY

I think there are two primary factors at play for this run. The effect of the Fed’s quantitative easing program cannot be minimized. If anything, I believe it gives market players and traders confidence to buy into this market. The continued program appears to have a psychological effect, in addition to the effect of the pumping of funds into the economy. It may give traders something to lean on for support when playing this market.

RETURN

The other factor that I think may be helping drive this market is return. Fund managers, big and small, traders, and individual investors are looking for somewhere to plant their money. Metals have been in a downturn since last fall. The real estate market recovery is spotty, and in limited areas. People are looking for good return on their investment, and the equity market seems to be providing it. It has become a bit of self-fulfilling prophecy.

THE TRADE

Sometimes I like being a contrarian, but I’m going with the flow here. I like buying the June E-Mini S&P 1600-1625 call spread at 9 points ($450.00) or better. With 57 days until expiration, this gives us an opportunity to take advantage of another test of contract highs. Risk is limited to the cost of entry plus fees and commissions. I am setting a target exit at double from entry (18 or better); if you are able to trade multiple contracts you may want to scale out at a higher price level.

RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS.