Today's Idea

The E-mini S&P 500 futures have continued their bullish move, breaking out to the upside and now within range of testing the 2001 high of 1373.50. However, some technical factors may be suggesting a near-term price correction is well overdue. The 14-day RSI has moved well into overbought territory, and trading volume on the rally has been moderate at best. In addition, CBOE Volatility Index (VIX) has fallen to levels where we have seen downside corrections take place in the past few years. Some contrarian traders looking to establish a short position or equity bulls looking for a short-term hedge may perhaps wish to explore buying puts in the E-mini S&P 500 futures options. For example, with the March futures trading at 1340.00 as of this writing, the March 1320.00 puts could be bought for 20.00, or $1,000 per option, not including commissions. The total investment in the put would be the maximum potential risk on the trade. The position would be profitable at option expiration in March should the March futures be trading below the strike price minus the premium paid for the puts.

Fundamentals

Traders got a positive surprise when the Labor Department announced the employment figures for January. Non-farm payrolls rose by 243,000 last month, nearly 100,000 jobs greater than the pre-report estimate and the largest increase since April of last year. The revisions to prior months' data was also supportive, with an additional 60,000 jobs added the prior two months. The private sector, once again, accounted for all the increases, rising by 257,000 jobs in January, with manufacturing jobs increasing by 50,000. Public sector employment continues to decline, falling by 14,000 jobs, as government entities continue to struggle with budgetary shortfalls. The unemployment rate fell by a larger than expected 0.2% to stand at 8.3%, which is the lowest rate in 3 years. The market's reaction to the positive payrolls report was as expected, with equity indices rallying sharply and bond prices falling, as traders are now beginning to believe that an improving jobs picture will allow the Federal Reserve to delay any implementation of further easing measures. If there was any downside to the report it would be that the aggregate hours worked increased by a very moderate 0.2% and the size of the workforce continued to decline, with the participation rate dropping by 0.3% to 63.7%. Even with the rather solid job gains the past few months, we are still a long way from recovering all the jobs lost since the start of the financial crisis back in 2008. Job increases need to be even more robust if we are to really acknowledge a recovery of the jobs market, however, few could argue that January's employment reports were solid and equity bulls should enjoy the moment!

Technical Notes

Looking at the daily continuation chart for the E-mini S&P 500 futures, we notice how well prices have held above the 20-day moving average since the recent lows were made back on December 20th. The index has rallied over 140 points since that time, with only a very minor correction earlier this week. To keep the rally going, prices must move above solid resistance in the 1350.00 to 1370.00 range, and volume needs to increase, as much of the recent price rally occurred on rather lackluster volume. The 14-day RSI has moved well into overbought territory, with a current reading of 75.26. The CBOE Volatility Index has fallen to lows not seen since July of 2011, which happens to correspond to the last major high made prior to a nearly 300-point drop in the S&P 500 index.


Mike Zarembski, Senior Commodity Analyst

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