Too Much Negativity on Stock Index Futures
By David Pappas, Archer Financial Services
Many believe the US is the powerhouse of the global economy. When there is a particular event or a time of uncertainty, many put their faith in the precious metals and the US dollar, which is also a safe haven to many. At current levels, the stock index futures market has reached the 50% retracement level since their March 2009 lows. In addition, many foreign equity markets have recovered by more than 50%. Regardless of the bearish influence of the unemployment rate at 9.5 % and other bearish factors, the market continues to advance. It was not that long ago that many analysts and traders believed that we were on the verge of an economical collapse.
-Chart provided by APEX
Now let’s take a look at the VIX index...
-Chart provided by The Market Oracle
The VIX index is known as the “fear indicator” and is considered to be a useful tool to predict turning points in the market. It is easy to see signs of trouble as prices advance, but it is very difficult to predict a market top. Despite the chaos in the job market, the sovereign debt troubles in the Euro zone and the budget problems in Illinois and California, in time, we will survive the financial turmoil.
Historically, September and October are very negative for US stocks. The Dow Jones lost more than 600 points in August, but it is starting to look like its stabilizing. Despite all the negative feelings about the market, unemployment claims declined from the previous weeks after large increases in July. Unemployment hovers at an uncomfortably high level of 9.5%, but is down from the 10.1% level late last year.
In the week ending Aug. 21, seasonally adjusted initial claims were 473,000, which was a decrease of 31,000 from the previous week's revised figure of 504,000. The 4-week moving average was 486,750, an increase of 3,250 from the previous week's revised average of 483,500. Economic optimism, reflected in the consumer confidence index, is up for the month, but down 5.3% from January.
On the first trading day in September, S&P 500 futures closed up 33 and the Dow Jones futures were up 266. This is the best opening for the month of September since 1998. In spite of this, there is much negativity still in the air and people are very skeptical about any market advance. Recent data shows that the economy is growing, just not as fast as predicted. Many fear a double dip recession. Even if the economy is able to grow, it might not translate into higher prices for stock index futures. The economy seems to be weaker now than earlier in the year and earnings could disappoint investors.
Many analysts see slow growth for the economy. The latest is out from Case-Shiller/S&P on home prices:
"Data through June 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index rose 4.4% in the second quarter of 2010, after having fallen 2.8% in the first quarter. Nationally, home prices are 3.6% above their year-earlier levels. In June, 17 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were up; and the two composites and 15 MSAs showed year-over-year gains. Housing prices have rebounded from crisis lows, but other recent housing indicators point to more ominous signals as tax incentives have ended and foreclosures continue.” – Urban Survival
Chart provided by Urban Survival
The Case-Shiller housing numbers showed home prices rising more than forecasted, up 4.2% in June.
Wells Fargo Capital Management strategist Jim Paulsen also thinks people are too negative. He agrees that economic indicators are weak, but every recovery has its ups and downs. Many people fear the worst is coming and that we will fall into another recession. Why? Manufacturing isn’t in bad shape. Housing is recovering from crisis lows and unemployment is down from 10.1%. We are definitely climbing out of deep recession. It will take time for America to recover just like we always have. Hopefully the negativity will slowly fade away as the US economy gets stronger.
Questions or comments about this article please contact Dave at 1.877.690.7303 or send an email to david.pappas@archerfinancials.com.
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.
