Risk-aversion is still dominating investor decisions, and similar to January’s theme, I see a trading affair in February and bottoming action in the stock indexes as well as many commodities. Once this risk-aversion lifts, better price action will be forthcoming—but maybe not just yet. Gold seems to be the place to be right now and I see futures likely to hit $1,000 an ounce.
At year-end 2008, everyone was talking about the “bubble” forming in the Treasury market, and it looks as if the air is being let out. In last month’s Futures Forecast report, I noted a double-top formation in the March bond futures in late December near 141, and I had expected a fall to 122. While the market didn’t quite get that far, I still see more downside likely and am sticking with that target. March bond futures could see a corrective rally back to near old support at 132 (that now marks resistance) and if that number is taken out, then I see 138 likely. However, it feels like this market is negative longer-term and I’d recommend selling rally attempts this month.
Big supply is coming into the market, which is bearish from a fundamental standpoint. This week, the U.S. Treasury announced plans to raise trillions of dollars to finance an economic revival, announcing a record $67 billion quarterly debt refunding. The Treasury said it will reintroduce seven-year notes and double the number of 30-year bond auctions to eight per year. According to a Reuters report, the Treasury estimated it will need to borrow a record $1.5 trillion to $2.5 trillion in fiscal 2009 — even before funding the Obama administration’s proposed economic stimulus plan of nearly $900 billion and a still-developing financial stabilization program.
Stock Market Bears Still in Charge
In the stock indexes, it looks like the bears remain in charge. I had expected the S&P 500 to trade in a range from 940 – 840 in January, and while I got the top right, the bottom was a bit lower than I expected. Perhaps my optimism was a little premature, but in time, I think given all the stimulus plans and packages will work to bring equity investors back into the market.
We still have a fear-driven market, and a stock market collapse could cause bonds to rally in the short-term to the levels I had mentioned. However, I think the March S&P futures should find support hold around 800 – 790. A move below 790 would likely bring 750 and a possible new low for the year. Corporate earnings reports have been terrible, and the unemployment rate ticked up in January to 7.6 percent, a 16-year high.
That said, I think this market is still closer to a bottom than not with the lower end of the range at 720 – 780 in February. If the market can muster a close above 850 for two days, that could mark a turning point for the bulls. In that case, I project a run to 920 for the March S&P futures.
As I’ve mentioned for several months, the dollar has been strengthening along with the Japanese yen as safe-haven plays. Watch those markets for signs investors are willing to move into other more risky assets. I see that trend likely as the month draws to a close, and I’d recommend selling the U.S. dollar index futures at 89, 88 and 86. This futures contract is traded at the ICE Futures Exchange, and represents the dollar’s standing against a basket of six global currencies. I may be sticking my neck out, but I think this market will move to 79 or even 70 in 2009 and I also would consider buying euro futures around 126 – 128 as currency trends start to shift.
Like the dollar, investors have turned to gold for safety. This market is bullish and I like it very much. Gold has the potential to benefit further as a safe-haven play, as a currency play if the dollar weakens, and as a hedge against inflation later this year or next. Gold futures have met some resistance around $920 an ounce, but I’d recommend trying to take a stab on the long side on a dip to $885 in the April contract. This market needs to get through $925 – $930 on a closing basis to recharge the bulls, but I think $1,000 is a likely target in February. On the other hand, a close under $845 would be damaging, and project a possible move to $780.
Crude Oil and Gasoline
I also like crude oil, but not quite as much as gold. This market is still tracking the economy and has been driven by emotion, selling off when negative economic numbers have been released. That said, I think that similar to the S&P futures, crude oil is closer to the bottom than not, and I recommend buying dips. I would consider $37 a barrel in the front-month contract reasonable in terms of a value area to consider buying futures. I don’t see crude oil likely moving under $35, and my projection is for a run to $50 by March.
We had bearish oil inventory data come out this week, and it didn’t break the market, which is somewhat encouraging. On Wednesday, February 4, 2009, the Energy Information Administration reported crude oil inventories rose 7.2 million barrels in the latest week to an 18-month high of to 346.1 million barrels. Crude oil supplies at the New York Mercantile Exchange’s delivery point in Cushing, Oklahoma, jumped 800,000 barrels to a record high of 34.3 million barrels. Despite this bearish supply data, crude oil prices remained firm, with the March contract closing the day down only 46 cents at $40.32.
Traders might consider gasoline as an energy play in lieu of crude oil. We have driving season coming up and the potential for an increase in demand. And from a technical perspective, the chart of July gasoline futures indicates a double-bottom is forming, the opposite of the formation we saw in the Treasury bond market in late December. I would consider buying calls as a possible strategy in gasoline this month, which offers a more limited risk-profile than outright futures.
Overall in February, we still have a wait-and-see attitude about whether our government can pull the economy out of the hole, and whether stocks will recover from 2008’s losses. Nearly every economic measure is indicating the recession is worse than we had thought. There is a lot of money is still on the sidelines but I don’t expect runaway markets just yet. Give it some time.
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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