Friedman's Futures Forecast: Market Outlook for June

By Jeff Friedman ISSUE 806 | June 2009

Month after month, the global economy has been in focus. There is no doubt the economy looks a little better than it did four months ago, and there’s no doubt it looks better than even a month ago. We heard the term “green shoots” come into our vocabulary. But even though optimism has driven the stock market and commodity markets higher, we have had a mixed bag of economic data. Housing sales may be improving, yet foreclosures are still rising. Consumers are growing more confident, but are still losing jobs.

U.S. Dollar – the Driving Force

I see the U.S. dollar as the driving force for many markets. The dollar has been in a downtrend, losing ground against the euro for three months. The ICE Dollar Index futures contract, which measures the dollar’s performance against a basket of six global currencies, hit a new low for the year on June 1. The dollar’s decline has helped push a number of commodity markets to new highs for the year during the first few days of June, including crude oil. Remember, most commodities are priced in dollars.

Because the dollar has been in a downtrend, because we are printing so much money, because U.S. interest rates are near zero, because we have debt to finance, I think the dollar will remain weak, but should make a corrective move higher this month. I see support in the U.S. Dollar Index futures contract at 77.50 - 76.50; I don’t think it will break 75 this month. If the dollar regains some lost ground, look for a close two days in a row above 82, which would mark a potential trend reversal and likely cause many commodities to weaken by month’s end. In the euro, watch for moves under $1.39 for signs of a trend reversal.

S&P 500 and Crude Oil

The stock market has also been an important factor in driving commodities, as it reflects investor confidence in taking risk, and the health of our economy overall. The stock market saw a nice rally in May; I thought it may turn as we need a correction, but the bullish trend held last month. I still think the market needs a correction, and I think a move in S&P futures to 880, or possibly 840, would be healthy for the market. In general, I see a higher probability June will be slightly more bearish than bullish, but I am looking for 840 or 850 to hold in the S&P on the downside. We could see 1,000 first though. A close below 890 two days in a row would mark a potential reversal that would neutralize the market’s trend.

Watch the stock market and crude oil in tandem—if the stock market falters, so too should crude oil. As the S&P futures hit a new high for 2009, so did crude oil, rallying above $67 a barrel. If you had bought dips in crude oil last month (or nearly any commodity for that matter), you’d be in good shape. In crude oil, I see a potential trend reversal on a close two days in a row under $62.50, from strongly bullish to neutral/down. Watch that level.

In general, crude oil tends to rally this time of year based on seasonal factors. Hurricane season is upon us, as is driving season. There are usually underlying fundamental circumstances that cause futures to move in a certain directional manner at certain times of the year. Keep in mind that when you are considering trading markets affected by seasonal trends, these factors are generally already reflected in market prices. So if you are trying to trade based on a certain seasonal trend or tendency, you have to strategize based on “noise” within the trend, or unexpected shocks that may not be priced in. Maybe you think conditions are different this year. You might have to enter or exit a trade earlier or later to catch the trend. As always, good money management skills are paramount.

Treasuries

As far as the Treasury market is concerned, the market didn’t rally as I had thought it would last month. I didn’t think the government would let mortgages uptick in yield. The Federal Reserve had been purchasing U.S. debt as part of a plan to acquire up to $300 billion of Treasuries to lower consumer borrowing costs. I thought the Fed would come in last month and force the 30-Year Treasury bond above 125 – 128 to keep rates low. It didn’t; the Fed let Treasuries slide and mortgage rates have risen.

According to a Bloomberg report on June 4, the fixed 30-year mortgage rate hit 5.29 percent, its highest level since December 2008. I think the Fed has been reluctant to step in because the stock market has been moving up, along with commodities. Confidence has been increasing, so perhaps we can absorb higher interest rates. I think the Fed may simply be saving its ammunition for later. If the 30-Year Treasury bond futures can close above 119-16, I think we will get a good buying opportunity and will start to see yields back off.

Commodities

Corn, wheat and soybeans have all recently hit new highs for the year as a cold, wet spring caused planting delays. Grains tend to peak in early June. Then, after we know what’s in the ground and if conditions look good, prices should drop off a bit as some of the early spring planting uncertainty is eased. However, some of the best markets for grains are weather markets. If we don’t get enough rain as the summer progresses, and/or we get really hot weather, prices can spike. And again, because the dollar has been in a downtrend, if we see the dollar rally, grains should pullback as well this month in line with seasonal trends under ideal growing conditions.

Gold has been another strong mover over the past month and like other commodities, could pull back. We’ve already seen a sharp decline on June 3, when gold fell nearly 2 percent to a two-month low after hitting $990 an ounce on June 1. Watch for a close in gold futures two days in a row below $940, which would neutralize the bullish trend.

I’m still bullish commodities and the stock market in general, but also see more volatile action in June as markets may be subject to bouts of profit-taking.

These are just a few of my thoughts and ideas for the month of June. 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 http://www.lind-waldock.com/events/, where Jeff covers even more detail.

Kristina Landgraf is editor of Lind eWire. She can be reached at editor@lind-waldock.com.

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