Before I get into my market outlook, it’s important to emphasize the importance of risk-management in volatile times like we have been experiencing in the markets. There are things you can’t control, so aim to control the ones to can. Know how much you are risking before you get into a trade, pick your entry and stop-loss points carefully. No matter what your opinion is of the presidential election’s result, we need hopefulness to return in wake of the dramatic freefall of the housing market, the credit market, and of course the stock market.

The stock market ended lower the day after the election, as the S&P 500 corrected back on November 5, 2008, after rallying four sessions prior. I don’t think the result of the election will make any big impact on market direction in the next month or so. Anything President-Elect Obama is thinking of doing won’t happen this year at any rate, as he’s not even yet in power. I do see it likely there will be some new regulations or restrictions impacting the financial markets and trading in the wake of the financial fallout of the past year, as well as efforts to break from our dependence on foreign oil. They won’t happen overnight, and any market moves tied to the Democrats’ victory on Tuesday will be only speculation. The economic situation right now is more important to market direction in the next few months. We are in the throes of a global slowdown. Jobs are being lost. The holiday shopping season is looking dire. That’s real, and that’s what’s on the front-burner. What Obama will do is on the backburner.

Let’s look at the fundamentals and technical picture for stock index futures, the dollar, crude oil and gold. During November, look for signs of bottoming action in stocks as well as commodities, and watch the dollar for direction in the latter.

S&P 500 Futures

The December S&P 500 futures saw a significant test of support late last month, falling to 825 on October 27. The market managed to rally back above 1,000 since then, but is looking shaky post-election. I see a correction back to somewhere in the middle of that range in coming days, perhaps to 910 - 905. A close underneath 834 is likely to encourage the bears, and could bring the March 2002 lows back into view, near 775 – 767. I think holding 767 will be key heading into 2009 to see just how bad the market views economic conditions.

I’d want to see the S&P 500 futures maintain closes above 834 to mark a sign of stabilization, and hope for a more bullish trend to take hold. But I’d also like to be sure unemployment isn’t out of control. The October employment report comes out on Friday, November 7, so we’ll see what that reflects. Analysts are expecting the unemployment rate to tick up to 6.3 percent amid a sharp loss in jobs. 

If you are inclined to trade on the bullish side this month, use a tight stop or buy a put to give yourself some protection. We aren’t out of the woods yet in terms of the economy. While uncertainty tied to the election is now past us, the post-election reality is that it will be a long road, and we won’t get out of this contraction/recesssion/depression for awhile. It’s not going to be easy for market bulls this coming year. But I do think we are finally making a bottom in the stock market.

Worth noting, a Bloomberg report tracked data on the stock market’s performance following U.S. elections, and found that since 1900, the Dow Jones Industrial Average rose 9.8 percent in the 12 months after the Democratic Party captured the White House. Only twice did the index drop, after Wilson’s victory in 1912 and Jimmy Carter’s in 1976. But this year, we have some formidable obstacles.

The question remains: Are the big players ready to embrace risk again, or not? For clues, watch the London interbank offered rate (Libor), which is the international short-term bank lending rate most corporate loans and mortgages are based on. The Libor for three-month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10. That’s encouraging, as we want to see the short-end of the interest rate curve unfrozen, and for banks to free up lending.

U.S. Dollar

The U.S. dollar has experienced a three-month rally, and after mild correction, got another lift following rate cuts from across the pond on November 6. The European Central Bank and the Bank of England both lowered interest rates at their scheduled policy meetings, which should be dollar-bullish. The ECB lowered its benchmark lending rate by half a percentage point to 3.25 percent, while the Bank of England cut its key rate by 1.5 percentage points to 3 percent, the lowest level there since 1955.

Looking at the Dollar Index Futures, which represents the dollar against a basket of six global currencies, I see the December contract backing off to 81 or 82 after its recent rally, which marks a breakout level from late summer. (It’s currently trading near 86.) To me, that means investors are increasing their appetite for risk globally. The Japanese yen as well as the U.S. dollar benefited from an increase in risk aversion in October as financial malaise spread throughout the world. If the dollar keeps rising further, I see it as a sign investors are being more risk-averse, and we’ll likely see the bearish trend in commodities continue a while longer.

I see much of the dollar's moves in the past few months as influenced by the carry trade, which has been blamed for driving the yen to a 13-year high. A lot of big institutions funded trades by borrowing at cheap rates in Japan and also the U.S., then buying higher-yielding assets in other countries, or even to buy commodities. Unwinding of the carry trade has spurred rallies in both the yen and dollar but gains aren’t necessary reflective of improving economic fundamentals. There is also the thought that the U.S. is likely to pull out of its malaise faster than European countries.

Crude Oil and Gold

If front-month crude oil futures can stay above $60 a barrel, I see a potential bottom holding. Crude oil is a commodity leader, so it’s important to watch no matter what market you trade.

As far as gold, it is typically seen as a safe haven, and an inflation hedge. Gold was under $450 an ounce in 2005, so it has more than doubled in just a few years--a big bull market, no doubt. Gold started pulling back along with most commodities when signs of a recession intensified this fall. Then we had a renewed safe-haven gold rally as the stock market was free-falling in October. Gold has backed off as stocks have tried to find footing in early November. From a technical standpoint, the chart doesn’t look all that strong at the moment for gold. The December futures broke a key trendline and remain in a short-term bear market. I am not sure anyone would want to buy gold as an inflationary play right now, but if crude oil starts to rally sharply, it will support gold. If the Dollar Index falls under 84, that will also support gold and crude oil.

On a short-term basis, you probably don’t want to be an aggressive buyer of either gold or crude oil. But in the next year, I think gold will make an all-time high above $1,000, and crude oil will get back to $100. So I’d be looking for good technical bullish setups for position traders.

If you like commodities, you can also consider trading the Canadian or Australian dollar for a currency play, as the health of their economies are tied to the strength of commodity exports. If the Canadian dollar moves under 80, then I think it can be taken as a sign that commodities probably haven’t bottomed yet. I also like sugar and corn, which are tied into energy trends as well as food consumptions. If December corn futures move over $4.50 a bushel, that would mark a reversal within the bearish trend.

In general, I view the theme for November as a trading affair marked by bottoming action in a number of markets.

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. 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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