S&P500 Futures Higher on the Year
by Alan Bush, Archer Financial Services
TECHNICAL INDICATORS
S&P500 futures are now higher on the year, which puts into question the old adage that "as goes January, so goes the rest of the year." For one thing, it flies in the face of our own research. In addition, the "January indicator," while often a reliable indicator when it flashes buy signals, tends to have a relatively poor record when it generates sell signals. For example, the "January indicator" last year predicted that 2009 would be a down year, when in fact, we saw one on the largest price advances in recorded history. This year we got the same bearish "January indicator," which, according to our fundamental and technical research, will prove to be another false sell signal.
S&P500 FUTURES - MONTHLY
Chart provided by APEX
We believe that the recent late January-early February correction is nothing more that another bull market correction. Every bull market has its corrections and the recent selloff does not change our thinking. There were corrections in July and November of last year, which were both followed by moves to new highs. We also believe that, like the previous corrections last year, this one will be followed by an advance to new highs.
S&P500 FUTURES - WEEKLY
Chart provided by APEX
The market's reaction to news is also generating bullish signals. During the last three weeks of trading we have noticed a pattern of futures tending to under react on the downside to bearish news and to over react on the upside on bullish news. For example, global equity futures markets fell after the Federal Reserve unexpectedly increased the discount rate by 25 basis points to 75 basis points. This was the first time that the discount rate had been increased in over three years. Although the Federal Reserve warned that the discount rate could be increased, traders did not think that the announcement would come as soon as it did. While the initial reaction was bearish, futures were able to quickly recover and trade higher. This bullish reaction to bearish news should be viewed as another sign of strength and that the late January-early February drop in prices was only a correction.
FUNDAMENTAL INDICATORS
The fundamental factors that influence this market appear to be bullish on balance. For example, fourth quarter corporate earnings have remained strong. In fact, earnings for S&P500 companies have been better than the analysts' median estimates over 76% of the time, which is the second highest percentage on record, according to a Bloomberg survey.
Federal Reserve policy remains friendly for stock index futures and is likely to remain so for the foreseeable future. Over the last six months, prospects of tighter credit from the nation's central bank continued to get pushed farther out into the future. It appears that Federal Reserve policy is likely to remain accommodative longer than many analysts are expecting and some of the primary government securities dealers do not believe that the U.S. central bank will raise interest rates until the second half of 2011. Currently the probability that the Federal Open Market Committee will increase their fed funds target by 25 basis points to 50 basis points at or before their November 3rd meeting is 47%, according to the financial futures markets. We believe that the next tightening of credit from the Federal Open Market Committee will not take place until after the mid-term elections or even not until 2011, since the FOMC in the past has shown a tendency to not make policy changes just before important political events.
The recent release of the Federal Reserve's "Beige Book," which was compiled in advance of their January 27th Federal Open Market Committee meeting, showed recovery in the economy, with nine of the twelve regional districts reporting at least some improvement. In addition, most of the recent economic reports are coming in stronger than the analysts' estimates. For example, the fourth quarter gross domestic product was up 5.9%, when an increase of 5.7% was expected.
CONCLUSION
Our research continues to tell us that, in the longer term, the strengthening economy will be able to overcome all other influences, including the political ones and that the downturns in stock index futures prices that we experienced last July, November and in late January and early February of this year were just that; only corrections in a bull market. Our most recent technical and fundamental analysis tells us that this bull market, that began in March 2009, is still a bull market and that all of the U.S. stock index futures markets will make new highs for the move in 2010.
If you would like more information on this article, please send an email to alan.bush@archerfinancials.com or contact us at 1.877.690.7303.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
