The bull run in the S&P 500 appears to still be on. The shutdown of the federal government didn’t appear to slow down the upward move. The index put in a new all-time high on Tuesday, gave a little back on Wednesday, and is pushing higher again Thursday morning. It appears that it will take a lot more than a mediocre jobs report to slow the move down.
NEW DATA SCHEDULE
We are in an unusual situation now that the government is up and running again. Monthly data and reports have been rescheduled (BLS Updated Schedule), and the information coming out requires some extra work when being reviewed. Unusual data, due to computer issues in various states pre-shutdown, is still being deciphered by those following the employment numbers closely. Future numbers are also going to be tougher to read, with everyone trying to figure out what is “real,” and what is a result of the 16-day shutdown.
BIG PICTURE
The S&P 500 is up nearly 23% for the year. Over the course of that run the market has put in new highs over sixty times. The market has fought back against several opponents (sequester, debt ceiling, default) and come out on top. That being said, I still have a hard time seeing what is driving this train. Obvious to most observers is the effect of the Fed’s QE programs on pumping funds into the economy. The free flow of money seems to be making its way into the equity markets.
TIME TO BE CONTRARIAN
There is an old phrase in trading, “the trend is your friend,” which can also be translated as don’t fight a trend. I try to follow that guideline as much as I can. But sometimes I like to be a bit contrarian. Right now I view the largest risk to the downside.
If you are long this market, I would be looking for protection. I like buying puts for protection, and put spreads to take advantage of a reversal. Right now I am looking to buy the Jan E-Mini S&P 500 1700-1650 put spread (long the 1700 put, short the 1650 put) at 10 points ($500.00) or better. Risk is limited to the cost of entry plus fees and commissions. The options expire in January, so the trade will take us through the year end. I am setting 20 points as my first target exit. If this run to the upside continues with no signs of slowing down, I would look to get out of the trade at a 5 point loss.
All good things must come to an end is a phrase most people are familiar with. The hard part is knowing when the end is here. I’d rather plan ahead for the end, than figure it out after everyone has left the party.
Contact Weyer here via e-mail.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. 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. WHILE 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.
