S&P 500

While I think the worst is behind us, the path to recovery will not be a straight line, but resemble a lopsided W. The right half of the W (which we are entering now) should show a higher bottom and top than the left side. I don’t see the S&P 500 futures falling under 735 or even 700. However, the market could see a breakdown to 950 or lower, as we pullback into the second bottom of our W formation.

September S&P 500 futures broke through some key resistance levels last month, reaching 1038. That level marked a double top, before the market broke down the first four days of September. The 1040 – 1044 area represents the Fibonacci 38 percent retracement, which proved strong resistance that is still in place.

A close two days in a row under 990 (or perhaps 988), would likely bring an acceleration of the recent sell-off. If support near 950 can’t hold, we could see 928 - 926. I think 900 should hold as psychological support, even though September and October tend to be very weak months for the stock market. According to the Stock Traders Almanac, September is the worst performing month on a percentage basis for the S&P 500, Dow Jones Industrial Average and Nasdaq.

Volatility is likely to increase in September and October, and volume should also increase. If we get bullish economic news, I see 1015, 1040 – 1044 and 1052 as near-term upside targets for the S&P. Maybe the market can breakout to 1105 on the upside, although I don’t see those higher levels in view until perhaps late October.

Keep in mind when looking at seasonal tendencies in any market, there are usually underlying fundamental circumstances that cause futures prices to move in a certain directional manner at certain times of the year (i.e., weakness in stock indexes in September or October). When you are considering trading markets affected by seasonal trends, these factors are generally already reflected in market prices. Other people have certainly thought of this. Have investors started taking profits in anticipation of weakness this fall? Were traders covering long positions before the August employment report came out? Seems likely.

So if you are trying to trade based on a certain seasonal trend or tendency, you have to strategize based on “noise” within the trend, or unexpected shocks that may not be priced in. Maybe you think conditions are different this year. You might have to enter or exit a trade earlier or later to catch the trend. As always, good money management skills are paramount.

The minutes from the August 11-12 Federal Reserve policy meeting were more upbeat, stating an economic recovery was underway and Fed officials “expected the pace of recovery to pick up in 2010.” The Fed did express some concerns, including a statement that the “conditions in the labor market remain poor.”

The Fed does seem to believe there is less risk right now in the economy, but they also have expected the unemployment rate would rise to 10 percent before the labor market starts to improve. For the rest of 2009, it certainly looks like interest rates will stay steady, but in my opinion, the Fed is not implying they will keep the Federal funds rate at zero next year. I see rates rising in 2010, which will affect both the long end and short end of the yield curve.

We know the employment situation is still weak, but the silver lining is that we are losing fewer jobs each month. The positive news is that trend has been improving. According to the Bureau of Labor Statistics, the average monthly job loss for May through July 2009 was 331,000, about half the decline of 645, 000 seen in November 2008 through April 2009.

For August, the BLS reported nonfarm payrolls fell 216,000, fewer than analysts were expecting, while the unemployment rate ticked up to 9.7 percent. I see the report as neutral to slightly bearish. From a technical point of view, momentum indicators, the Stochastics and Relative Strength Index (RSI) remained bearish immediately after the report, so it didn’t change my overall view too much.

Gold

Last month, I gave three reasons why gold looks bullish. We have the safe-haven play, which has come into play in early September, the currency play (gold typically moves conversely to the U.S. dollar) and the inflationary play, which could come into focus early next year.

Since 1989, September has been one of the strongest performing months for gold. We saw that play out right at the start of the month on September 1, when COMEX gold futures rallied $30 an ounce. I think this market still looks bullish, but $990 – $993 in December gold should mark resistance. I don’t really anticipate a move much above $1,000 this month, unless perhaps the stock market collapses.

Sugar

Sugar prices hit a 28-year high, and this market has been looking overbought for some time now. It continues to defy gravity. I have underestimated the strength of this market, and the magnitude of supply and demand factors that are driving this market higher. We are seeing real velocity here. If you think this market is bubbling up, and want to play the short side, I would recommend buying puts for a defined-risk play. This market can be volatile.

On a fundamental basis, this market remains bullish. India and Brazil are the two largest producers of sugar, and they’ve both had problems with their crops this year. India needed a lot of rain this year and didn’t get it, and Brazil got too much rain. Sugar production in India should have been around 21 million tons, but they produced about 16 million tones. They will need to buy roughly 7 million tons, but remember, Brazil’s crop was diminished. The Middle East region typically uses more sugar in the early fall. By November, consumption should diminish and this bull market might subside by then.

We could see 27 to 30 cents a pound in sugar if we can’t stop this bull market. From a technical standpoint, I don’t see a sell signal yet. There will likely be some mild pullbacks that could stop some traders out, but I don’t see a significant decline.

If sugar does see a close under 22.30 for two days in a row, 21.50 seems like a reasonable downside target. A close under 21 could bring 19 in view. Sugar and natural gas are two markets which are not trading based on the economic recovery (or recession) story. We have overriding supply and demand factors at work in these markets, unlike a market such as crude oil, which has been more closely correlated to the economic cycle.

These are just a few of my thoughts and ideas for the month of September. 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. 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. 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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