Friedman’s Futures Forecast – Monthly Market Overview & Outlook
[This article will be provided monthly along with a live webinar where I will cover similar ideas and take questions from those attending. You can register for this monthly webinar, entitled, “Friedman’s Futures Forecast,” through the Lind-Waldock Web site.]
Every month going forward, I will be covering the fundamentals and technicals to get an idea of what is really driving the markets. With so many things involved in futures trading, where do we even start? Instead of looking at the trees, let’s start by looking at the forest. Let’s start off with the economy.
I don’t care where you live in the country right now, but most people would acknowledge that we are in a slowdown. The economy might be getting worse. We hear it on the news. We hear it from the political parties. In this election year, the number one concern of the public is the economic welfare of this country.
It is important to understand how the economy as a whole is affecting various futures markets. There are many different types of futures markets available to trade. This can be somewhat overwhelming for someone new to futures. Below is a simplified diagram of how I would break down most of these markets:
The stock market which is one gauge of the U.S. economy has performed poorly since the start of the year. The U.S. government is currently scrambling to pass a stimulus package to give a short-term boost to the economy. Of course, there are still questions of whether or not this will be effective. Meanwhile, the Federal Reserve has cut interest rates numerous times to stimulate the economy. The Federal funds rate, its key short-term lending rate, is now at 3 percent after a 50-basis point cut on January 30. However, rate cuts by the Federal Reserve can take up to three or four months to seep into the economy.
I believe the S&P 500 will lose as much as 15-20 percent this year, but will end the year only down about 5-10 percent. I think the market can still test the January lows of 1260 and maybe even go as low as 1225, but at the same time, I think the market will be higher than 1300 by September. Therefore, for the month of February I would recommend selling rallies.
The Federal Reserve has aggressively cut the Federal funds rate and I believe they will continue. How will this affect other markets? The reason the Federal Reserve is cutting rates is because we have a credit crunch, largely due to the housing market’s subprime woes. I don’t see the housing market making any real improvements in February or even March.
Right now, I would recommend buying dips generally in bull markets. By the summer, as I see it now, I would likely recommend selling rallies in the bond market and buying dips in the stock market because I think the second half of the year will experience a completely different mood. For February and early March, I would generally recommend selling the stock market and buying Treasury futures. However, the Treasury market cannot rally quite as much as the stock market can fall only because the Federal Reserve can run out of bullets. Eventually, the bond market is going to say this is inflationary. There is definitely a limit as to how much the Federal Reserve can help the economy, without sparking inflation.
We haven’t heard that much about inflation because the stock market has been down and most people are focused on whether or not we are entering a recession. However, if the Fed lowers interest rates enough, we will get inflation. We have seen this in the past when interest rates, namely, Federal funds, were at 1 percent for over a year. As a result, we saw a bubble develop in the housing market because of all the available cheap money. We also saw low interest rates fuel a bull run in the stock market along with various commodities, including gold, crude oil and grains. These bull markets owe part of their run to all the cheap money available through low interest rates.
My personal opinion is that the Federal Reserve will cut the Federal funds rate another 50 basis points, possibly through two separate 25 point cuts. Let’s take a look at some various markets that are directly affected by interest rate cuts.
Foreign Currencies
Foreign currencies have been in a bull market as the U.S. dollar has been dragged lower since 2001. However, the U.S. dollar’s price has stabilized and consolidated since its November lows. If you look at the euro FX futures chart below, you can see that it’s getting kind of choppy. Psychologically, $1.50 seems to be a barrier.
Unfavorable economic reports are part of the reason we have seen this consolidation. Consumers seem to be losing some confidence in the European market. Keep in mind that the European Central Bank is traditionally very hawkish, meaning they are quick to raise interest rates to keep inflation in check.
The unfavorable economic reports have led many to believe that the European Central Bank will not continue raising rates and will instead hold them steady or even lower them. This belief has led the euro futures to consolidate in the last few months. This consolidation leads me to believe that we may be near a top. At the current levels, I believe this is a great opportunity to trade a range because of all the uncertainty in Europe. Currently, I would recommend buying $1.44 and selling near $1.48 in the March euro futures to play the consolidation range we are in.
Gold
Gold has been in a bull market for the last four years and I believe it is going to see some major dips. However, if the euro currency doesn’t fall below $1.40, then I think that gold will continue its bull market. Therefore, I would still recommend buying major dips in gold with the idea of playing this market in a range. The range I see is $850 to $940 an ounce, but I don’t see this market breaking $800. Keep in mind that the gold market is currently very volatile and that presents both risks and rewards.
The fundamentals behind gold have stayed the same. Investors and traders are still treating it as a safe-haven and a third currency. As long as the bond market is in a bull market, so too will the gold market.
If gold falls, I would recommend buying it on a dip to $850. Technically, it could go as low as $780 and still be in a long term bull market. I am expecting this market to continue along its bullish way.
Summary
Overall, here is where I see things going. For the month of February market participants will continue talking about a recession. By August, I believe everyone will be talking about inflation. As the Federal funds rate cuts seep into our economy, we will see steadily improving conditions.
The stock market is currently in a downdraft after a four-year bull market. This is simply because our economy is weak. The Federal Reserve is lowering interest rates to stimulate our economy, specifically the stock market and the housing market. This is putting the Treasuries in a bull market with prices increasing as yields lose ground. We have choppiness in the foreign currencies, and a possible top in the euro currency. This could mean that the U.S. dollar is near a bottom after steadily declining during the last six years.
It used to be widely believed that when America sneezes, the world catches a cold. In recent years however, many have pointed to the strength of other countries like China, or areas like Europe and the Middle East. Many believed the increased strength of those economies could weather a U.S. downturn. However, it looks like some of the U.S. economic issues are seeping into Europe and the Middle East. If U.S. consumers face a downturn and stop buying the many products the Chinese make, their economy will inevitably slow down. If the U.S. went into a depression, the Chinese economy, along with the world economy likely face a slowdown as well.
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.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
*No representation is being made regarding the actual or hypothetical performance of the systems at any other brokerage firm or prior to the dates reflected above. These numbers include commissions, but not fees. Contrary to most published results, please note that these monthly returns are calculated based on closed trade profit/loss and do not include changes in open trade equity. Futures trading involves the substantial risk of loss and may not be suitable for all investors. Past performance is not necessarily indicative of future results. All information, including performance and program description, has not been reviewed or verified by Lind-Waldock.
