What, Me Worry?

Fundamentals

Apparently, stock index futures traders believe all will be well with the economic environment in the U.S., as S&P futures continue to rally, moving ever so closer to testing the yearly highs. Stock bulls did get some good news on Thursday, as weekly jobless claims resumed their decline, falling from 3-month highs. Jobless claims fell by 29,000 for the week ending on February 27th. More importantly, continuing claims also fell to levels not seen in over a year. Also supportive was release of the Labor Department's report on non-farm productively for the 4th quarter, which showed a better than expected increase of 6.9%. Unit labor costs fell by a 5.9% annual rate, which should help elevate concerns of wage inflation and give Federal Reserve officials another reason to keep interest rates near record low levels for the foreseeable future. Not all the economic news out on Thursday was positive, as U.S. factory orders rose by only 1.7% in January, which is below estimates of a 2.0% gain. Pending home sales fell by a much larger than expected 7.6% in January, as the harsh winter weather took its toll on potential home buyers. Traders will likely now turn their focus to Friday's release of non-farm payrolls for February. The current consensus is for payrolls to have fallen by 70,000 jobs last month, although the range of estimates is rather wide this month, as traders and analysts try to estimate the effects on employment attributable to the severe winter weather seen in the eastern parts of the U.S. last month. The unemployment rate is expected to increase by 0.1% to 9.8%. Although there are signs of improvement in the U.S. economy, it's unlikely many are willing to say we are completely out of the woods ― especially until we see firm signs of sustained employment growth, which would do wonders for consumer confidence levels and help to justify the equities market rally that began nearly a year ago.

Trading Ideas

With economic indicators providing a mixed picture for equities in the near-term and the VIX (CBOE's S&P 500 Volatility Index) hovering near its recent lows, we may start to see some bigger moves in the S&P futures, with an increase in volatility a definite possibility. Given this scenario, some traders may wish to investigate strategies that will benefit from a big move in the indices, as well as an increase in volatility. One such trade involves the purchase of April E-mini S&P 500 straddles. With the June E-mini futures trading at 1114.50 as of this writing, the April 1115 straddle could be purchased for 53.00 points, or $2,650 per straddle, not including commissions. The premium paid is the maximum potential loss on the trade, and the trade will show a profit at expiration in April should the June futures be trading above 1168.00 or below 1062.00. Given the effects of time decay on a long straddle position, some traders may wish to close out the trade before expiration if the price on the straddle falls to 50% of the original purchase price.

Technicals

Looking at the daily continuation chart for E-mini S&P futures, we notice the recent rally from the February 9th lows of 1054.00 has occurred on declining volume. This could be construed that traders do not truly believe the recent rally will hold, as they are not aggressively adding to long positions as the index rises. The 20-day moving average is attempting to cross above the 100-day moving average, which if accomplished, would send a buying signal to momentum traders. The 14-day RSI is moderately supportive, with a current reading of 58.13. 1125.00 is seen as near-term resistance, with major resistance found at 1147.25. Near-term support is found at 1084.50, with major support seen at 1054.00.

Mike Zarembski, Senior Commodity Analyst