At the end of the 1st quarter, the S&P E-Mini has come off sharply from the opening levels in 2008. After opening the year January 2nd at 1478.75, the markets have been exposed to perpetual stream of negative data, crisis, and overall weakness. At the time of publication, the S&P E-Mini (ESM8) was trading at 1332.25.

In March, the E-Mini S&P has rebounded from 19-month lows but the underlying inflation & recession fears are keeping the market on guard. One major theme of this weekly publication has been the markets propensity to sell-off at a much more rapid and aggressive pace than it has been to rally – despite fundamental or technical backing to the moves.

That concept is simply indicative of the type of environment we’re in. Pessimistic outlooks and hesitant belief in positive data has marred the first quarter, which closed in dreadfully slow fashion the week of 3/24. A “negative bias” is prevalent in the major marketplace and unless things drastically turn around, the 2nd quarter may not be much better.

The final report on the fourth quarter was released earlier in the week, and showed the economy grew at an annual pace of 0.6% in 2007 Q4, which was the slowest period of growth since 2002. Fourth-quarter earnings at S&P 500 companies fell almost 23% from 2006 with the bulk of the weakness being centered with financial companies.

We may have some good news to end the quarter on Friday. PPI came out at +0.1% Feb v. 0.2% Jan. The PPI measures core inflation, which, if it continues to fall – is a sign that the Fed can cut rates again at their next meeting. Remember inflation worries were one of the main reasons why the Federal Reserve did not cut a full 1% at the March 18th meeting.

On another positive note, in a report after market close Thursday, the Fed announced investment banks and broker dealers borrowed more than $30 billion a day from the discount window in the last week. This borrowing may be perceived as negative, but the same banks and broker dealers, in large part, stayed away from the separate 28-day lending facility recently opened by the Fed.

To me, this reads that the larger investment banks are doing fine with liquidity. Also, besides the initial reaction and fallout of the Bear Sterns experience, the markets have largely recovered and stabilized. It seems we’ve found firm footing at these levels in the ESM8.

Personal income was also up 0.5% and personal spending was up 0.1% for February. The market rallied slightly on these reports, but markets were near the weekly lows of 1325.25 shortly thereafter.

In whole, for the first time in months, I just rattled off 3 positive paragraphs on the state of the financial markets. Most analysts expect Q2 to be just as treacherous as the first quarter, but expectations are extremely high for the last half of the year.

Considering everything these markets have been through in the 1st Quarter, it’s difficult not to have positive expectations for the rest of the year. Late April and early May will mark period of reporting for financial firms, which, in my opinion, will make or break the 2nd quarter.

As always, for specific levels and trade recommendations, please contact me.

Past performance is not indicative of future results. The information contained in this report is intended for informational purposes only and is the opinion of the writer and may change at any time. This information was compiled from sources believed to be reliable but accuracy cannot be and is not guaranteed. There is no warranty, expressed or implied, in regards to this information for any particular purpose. There is significant risk involved in trading futures and or options on futures and may not be suitable for all investors. Investors should consider these risks and evaluate their suitability based on their financial conditions.  This information is provided freely and is not in the capacity of a trading advisor.

Josh Russo

Alternative Investments
Peak Trading Group
A division of Rosenthall Collins Group, LLC
800-231-7452
312-795-4111
312-795-4120 (fax)
www.peak-trading.com

Josh Russo graduated from the University of Iowa in 2004 and has been in the futures industry since. His specialization is in day-trading the E-Mini S&P and alternative investments, including Managed Futures and Commodity Funds. In his free time, he enjoys outdoor activities, traveling and sports.