Coping with Market Ups and Downs
By Jeffery Friedman ISSUE 701 | JAN 2008
January has proven to be an emotional month for a variety of futures markets. We've all seen the headlines about the stock market's malaise, plunging five days in a row with a lot of stomach-churning, intraday up-and-down moves leaving investors wondering what to do. So far, the Federal Reserve's emergency cut of 75 basis points in the Federal funds rate didn't do much to help ease investors' fears of recession. We've also seen huge moves in many commodities. Soybean futures moved above $13 a bushel in mid-January, taking out the old 1973 high of $12.90, but have corrected back down. We've seen gold climb to a record high above $900 an ounce this month, and then likewise drop. We've seen heightened volatility in just about every market lately. It's extremely high right now, and the ranges are bigger, faster and more pronounced. Old support and resistance numbers may be overshot.
Will it calm down? Sure. The question is when. But we know causes it. First, there was greed, and now there is fear. My advice during times like these is to trade smaller, and use wider stops. If you usually trade five contracts, for example, trade two. If you trade one big S&P contract, trade one E-mini S&P contract instead.
The markets are moving faster than we can keep up with. My advice for the next few weeks, no matter what market you trade, is to reduce your risk as much as possible when trading. It's tempting to jump in when you see big moves, because after all, volatility equals opportunity. But don't use up all your ammunition, because with market moves like we've seen recently, you could be out quick. Wait for opportunities in February, and into the spring. Preserve your capital to stay in the game.
This week is an extremely busy week for the markets, and another volatile one. We had the President's State of the Union address at the start of the week, the regularly scheduled two-day Federal Open Market Committee meeting on Tuesday and Wednesday, and several key economic reports capped off by the January employment report on Friday, February 1.
S&P, Gold and the Fed
The Fed is quickly running out of room to cut interest rates much further. Should the markets get their wish that the Fed cuts the Fed funds target rate by 50 basis points more this week, then the real Fed funds rate will be somewhere between negative one-half percent and positive one-half percent, depending on your definition of inflation. While the Fed funds futures market is pricing in a 2-1/4 Fed funds rate by August, a realistic assessment suggests that is not likely. Hopefully, the Fed realizes that it is partly to blame for the housing bubble, as it was too loose with money after the 2001 recession, and will not repeat the same mistake this time while trying to avert a 2008 recession — which many see as being averted, but barely. Remember, rate cuts take a few months to work their way into the economy.
Now that I've given you some general coping guidelines, let's take a look at possible market scenarios in the wake of the Fed meeting this week. The S&P faced a bit of profit-taking last week after the surprise rate cut. On Thursday, January 24, March S&P futures moved above the 10-day moving average, a bullish sign, but by Friday the market headed for a lower close. It's been volatile, to say the least. The drop below 1360 offered a signal on Friday to get out if you were long. Now, let's watch for support at 1260, the panic low, and then 1225 – 1223, a previous breakout. In general, I see the situation as calm, and somewhat neutral for day traders early this week. The market may bounce around, pressing lower then rallying up a bit ahead of the FOMC meeting's conclusion Wednesday. I see stabilization before then; people will want to get on the sidelines.
The way I see things now, I think the markets could be disappointed with the Fed. Given the Fed already delivered a 75 basis-point reduction this week, it may only offer up another reduction of 25 more on Wednesday. If the Fed is too aggressive, it won't have any ammunition left, and they might fuel inflation further. After the meeting, if the Fed only cuts 25 basis points, I see the stock market falling out of bed. I'd be looking to sell S&P futures for a move down to 1290 in that case. I'd also be looking to sell gold futures, which I see falling possibly to $910 an ounce. If the Fed cuts more-than-expected, 75 basis points, then I think we are off to the races in both markets. If they cut 50, as expected, it will remain choppy as participants try to figure out where to go next. But I think the market should be satisfied and we would be more likely to see stocks move up, with March S&P possibly at 1485, and gold up $950.
Jeffrey Friedman is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com.
Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.
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