September turned out to be a great month for both stocks and commodities. I don’t see any big trend shifts before the November elections, but we could see corrective moves.
My theme for October overall is: buy the dips. (And watch the dollar)
September is historically a bearish month for the stock market, but not this year. The S&P 500 and Dow Jones Industrial Average saw their best September performances in over 70 years, up 8.8 percent and 7.8 percent, respectively. The Nasdaq rose 12.9 percent, its best September gain since 1998. We not only saw a stock market rally, but metals as well as many softs and grain markets joined in. Gold reached a new record above $1,300 an ounce, and cotton hit a 15-year high.
The September employment report is likely to set the tone for stocks in October, at least during the first half. According to a Bloomberg survey, non-farm payrolls are expected to be down 8,000. The market could be volatile in October, but the bullish trend seems more likely to prevail, in my opinion. I still believe in the U.S. recovery story. A shift to a more Republican balance in Congress after the November elections is likely to be viewed in a positive vein by the markets.
As far as the near-term technical outlook, it could be choppy and difficult to trade, but the October 5 breakout of the December S&P 500 futures signals a climb to 1,170, with a grind higher toward resistance at 1,166. December S&P futures in the next day or so. My analysis shows the formation holds potential for an emerging bull drive to reach 1,204. We may see corrective dips back to Tuesday’s range, but holding 1,139 will continue the formation and reinforce projections to 1,172. If the market closes under 1,139, be on alert for a drop back to 1,133 to test for a reversing turnover. Closes under 1,133 could move the S&P futures back to 1,122.
S&P 500 Futures
U.S. Dollar and Euro
Weakness in the U.S. dollar has helped spur on the commodity rally. Most commodities are priced in U.S. dollars, and therefore a weaker dollar gives foreign buyers more purchasing power. We also saw a return to the “risk trade” in September, as investors were more willing to move assets into stocks and commodities, perceived as higher-risk investments.
The U.S. dollar dropped to an eight-month low against the euro, but it’s not because the situation in the Eurozone has vastly improved, or the U.S. has substantially deteriorated.
The move is tied mainly to speculation that the Federal Reserve will engage in further quantitative easing measures. The stock market likes cheap money. That being the case, as a trading strategy I recommend buying the euro futures on dips, and selling the December U.S. Dollar Index futures contract on a bounce above 80; 80.25 – 80.50 and 81.90 – 82 look like good areas for try and establish shorts. When the dollar drops, it means the risk trade is on.
I see the euro likely heading up to $1.41 – $1.42, then I would expect a corrective pullback. I would recommend buying on dips. A decline to $1.33 looks like a good place to buy, but use a stop near $1.31.
U.S. Dollar Index Futures
Euro Futures
Gold
Gold has been in a bull trend for some time, culminating in new record highs in September. In October, I would not be surprised to see a correction to $1,261 an ounce. I recommend looking to buy dips to $1,275. I’m not expecting the bullish trend in gold to change, at least not until after the November elections. Stay with the trend. Gold is likely to remain attractive to investors for many reasons, and $2,000 gold is in the realm of possibility. If the “risk trade” is off, gold is likely to benefit as a safe-haven. It could also benefit as hedge against potential inflation, which is a longer-term threat given prolonged fiscal and monetary easing.
I’d be happy to address any questions you might have, as well as how you might apply these concepts to a specific trading strategy.
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. You can follow Jeff on Twitter at www.twitter.com/LWJFriedman. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page.
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