Even if you are purely a technical trader, it’s hard to ignore the fundamentals influencing the markets right now. I think the stock market will rally on the likely passage of President Obama’s stimulus plan this week, as well as details of Treasury Secretary Timothy Geithner’s bank rescue plan. However, I don’t see it lasting and would use rallies as opportunities to establish short positions in S&P 500 futures or options. Economic fundamentals remain weak and not supportive of further gains longer-term.
Sentiment has been bad for stocks (as I’m sure you know) but S&P 500 futures have been forming a base around 800. The government and our Federal Reserve are being proactive about keeping the market afloat. If you look at an intraday chart of the March E-mini S&P futures contract, you can see the volatility–and opportunity–for bulls and bears alike in this environment.
On Friday, February 6, 2009, major stock indexes gained despite the release of a bleak January employment report that day. The Labor Department reported that the nation’s unemployment rate rose to 7.6 percent, a 16-year high. Almost 600,000 people lost jobs in January. Despite that news, optimism for the passage of the pending stimulus package and bank rescue plan generated a positive stock market finish last week.
On Monday, February 9, Obama highlighted elements of the $800 billion stimulus package in a town hall meeting in Indiana, including tax relief for middle-class families, an extra $100 a month in unemployment insurance benefits, provisions to encourage development of alternative energy sources and added funding for education. Geithner is expected to outline an awaited bank bailout plan next on Tuesday, February 10.
I think these developments will help boost sentiment a bit, and cause the market to rally in the short-term. March S&P futures stalled near technical resistance at 870 today, which really isn’t surprising given the economic uncertainty we have right now. I believe these plans and packages will be firmed up and approved this week or early next week.
On a daily chart of the S&P 500, technical indicators lead me to believe we’ll see a test of 900. At that point, I think the market may back off a bit, and that’s when I would recommend establishing a short position on a renewed downturn.
You can certainly sell the March futures, but the market is extremely volatile and it’s difficult in this environment to weather the storm without a lot of capital. You can consider buying put options instead, which offer you a less costly alternative with defined risk. You won’t get stopped out of your trade on short-term, volatile market moves. I see a lot of the fear we had late last year going out of the market, so options have become a little cheaper as well. You could consider buying an April 830 put, or a put spread where you might buy the 830 put and sell an 800 put against that to finance the trade if the market moves down below 830. You may want to consider options closer to the money if you don’t mind paying a little more.
In general, I believe the low for the stock market is in place for at least another 2-3 months. However, I am not convinced the stimulus package will create lasting gains in the intermediate-term. Banks need to start lending and consumers need to regain confidence. We are still bleeding jobs the economy is likely to remain weak for a while longer. Use any euphoria tied to the passage of the stimulus plan this week as an opportunity to sell stock index futures at better prices.
Please feel free to call me with any questions you have about the markets, or to develop a customized trading strategy for your particular account size and risk tolerance.
Bill Dixon is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. He can be reached at 800-445-0567 or via email at bdixon@lind-waldock.com.
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