March has come in like a lion for equity investors, as the stock market sank to 12-year lows in the first few days of trading this month. Rallies will be greeted with high hopes, but during March, I don’t see a major shift in the prevailing trend. I had thought the 2008 lows would hold in the major stock indexes, but the strength of the bear market caught a lot of investors off guard.
It’s very important to look at major fundamental concepts and trends on a longer-term basis, even if you are a short-term trader, so let’s take a look at themes and trading strategies for the major financial and commodity futures markets in March.
Global policymakers have thrown a lot at the economy to give it a jump-start. President Obama is trying to generate some optimism and the House of Representatives is set to vote on a revised plan to help ailing homeowners. It will take time for all these stimulus measures to work. I think overall, the fear will subside a bit by month’s end in March and buyers may start picking up bargains. But regardless of what market you trade, go with the prevailing trend until you get firm signals a shift is taking place.
Bonds Looking Bearish
The Treasury market has been a safe-haven over the past few months. I had expected the March 30-year bond futures to top out above 140, and then offer a good selling opportunity in February. I still think Treasuries have likely peaked, and looking at the charts, overall this market appears to me to be headed lower in price and higher in yield.
The steep rally we had at the end of 2008 and into early 2009 saw the market make a double-top that is holding as resistance. As the stock market collapsed to 12-year lows in the past few sessions, the Treasury market did not retest those highs above 140. That’s a sign to me the safe-haven bid looks to be fading and was likely overdone. So at this time, I recommend longer-term investors sell Treasury bonds, but look for favorable levels to enter your trade. For shorter-term traders, I’d be looking to buy around the lower end of the range 124, as I think that should hold as key support on a short-term basis this month.
There is a lot of financing to be done to fix the economy, and the government will be selling Treasuries and printing money. That means looking beyond this month, we are going to have inflation. Inflation is bearish for Treasury futures prices and bullish for commodities, but that won’t likely be a worry for at least another four or six months. For now, we are still in deflationary mode and the Federal Reserve is still trying to stop the bleeding.
Stock Market Bears Still in Charge
Trying to pick a bottom in the stock market is like trying to catch a falling knife. I had thought the S&P 500 futures would not fall below 700, but instead the market saw a severe breakdown, pushing the March contract to 682. There has been more negativity than I had expected! Looking at a chart of the weekly chart of the E-mini S&P 500, there is wedge formation that projects a possible move to 650 if things really get ugly.
On the flip side, the market needs to close above 737 to shore up sentiment, and really needs to get above 875 to neutralize the bearish trend we are in. Until then, this is still a bear market. I’d even say a corrective rally could push the market as high as 1,050 and I still wouldn’t be convinced the bearish trend of the past year is over. The economy remains terrible and we need to see some signs of optimism emerge. I recommend short-term traders sell rallies until we see a series of closes over 737. Use that as a pivotal number in terms of short-term momentum.
Gold
Gold futures have benefited from safe-haven buying in the past few months, and rallied above $1,000 an ounce in February. However, as the stock market sank to 12-year lows in early March, gold failed to retest those highs. The failure to rally on what should be a bullish fundamental factor for the market means that the safe-haven status in gold may be ebbing. I still like gold, but would be cautious of potentially big corrections and this market could consolidate a while if the stock market stabilizes.
That said, gold been one of the strongest-performing commodities over the past few months and I think that will remain the case this year. I see the factors supporting gold shifting from a safety play to a currency play (as the dollar backs off), and an inflation play later this year. I don’t feel gold will collapse, and should retest $1,000. We may not see new highs if the stock market starts to stabilize, but I would want to be long gold again sometime this month.
Energies
Crude oil has been seeing a drift up off its February lows and I feel this market has likely bottomed. April futures are facing resistance at $48 a barrel but we have some solid seasonal factors at play for energy markets starting in March. A close above $52 would really get this market going, but I actually am even more bullish gasoline than crude oil. When you go to the pump this 4th of July, I think you’ll be paying much more than you are now. The RBOB gasoline futures are making higher highs and higher lows, which is technically bullish. This market needs to push above resistance near $1.42 a gallon, but if it does, I can see a rally to $1.80 possible. I would recommend setting up bullish gasoline positions this month.
Currencies
They say the trend is your friend, and in the case of the euro, this market is in a downtrend and I’d remain short for the time being. The euro slid under $1.25 on March 5 after the European Central Bank cut rates by a half-percentage point to a record low, and forecasters predicted a worsening contraction in economic activity this year. However, I’m afraid of these bottoms, and am anticipating a corrective move. We saw a big U.S. stock market reversal on March 4 which took the euro higher, and if the S&P can stabilize and rally again, the euro will likely rebound again too.
The U.S. dollar has been used as safe-haven play similar to Treasuries and gold, so if the S&P rallies, the dollar will back off and we should see the euro gain some steam. The dollar looks a little overbought right now, although if you are momentum trader you have to go with the trend for now. If the S&P 500 futures rally to 850 or 900, however, that should push the dollar down as some of that safe-haven buying unwinds. I see the dollar index futures contract sliding to 81 or so, and crude oil and other dollar-based commodities will benefit. I recommend looking to short the dollar index futures in coming weeks, as I think the S&P will bottom. I would likely change my strategy if the dollar index contract moves above resistance near 90.50 – 91.0. I might try again around 92.00 to get short, which was a peak in 2005. If the dollar index futures close above 92 on a weekly basis, it would be a bit unexpected and I wouldn’t fight the trend.
Please feel free to call me to discuss these or other markets, and to incorporate specific trading strategies for your account size and risk tolerance. Good luck and good trading!
Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page. You can view an archived webinar of this forecast at www.lind-waldock.com/events, where Jeff covers even more detail.
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