Economic Data Fails to Support Stocks: Short S&P Futures
The stock market has been gaining lost ground over the past few sessions, getting a boost from the Federal Reserve’s interest rate cut last week and another from an improved offer for Bear Stearns from J.P. Morgan this week. However, U.S. economic data still look weak and isn’t supporting a change in the longer-term bearish market trend. I see more downside possible this spring and am recommending bearish strategies using S&P options.
This morning, the Commerce Department reported orders for durable goods slumped 1.7 percent in February, following a 4.7 percent decline in January. New home sales fell 1.8 percent in February to the lowest level in 13 years.
On Tuesday, consumer confidence was reported to have dropped to a five-year low and according the S&P/Case-Shiller index, home prices in 20 U.S. metropolitan areas fell in January by the most on record, more than 10 percent in January. So far, the economic data isn’t bringing the type of good news that we’d want to see to pull the stock market of its 2008 slump. The news just seems to be more bad than good overall, and until we get some improvement, I’m not convinced the lows are in.
I am recommending short positions in the S&P futures. I see this market as still in a downtrend despite a few powerful corrections. I’d consider put options, including put spreads. You can consider buying the 1330 or 1325 April S&P put options, a strategy that offers defined risk. If the market can bounce up a bit, you should be able to pick these up for about $1,150, not including commissions. That is your defined risk on the trade, should the market reverse and start heading sharply higher. You can also consider a put spread, buying the April 1325 S&P put and selling the 1275 put against it, which I feel offers a good risk-reward ratio on the S&P in a 50-point range.
The April E-mini S&P 1330 put is 30 points right now, and the April E-mini S&P 1325 put is 27 points offered right now. The ideal place to put these on is as close to 1350 as possible, to be able to pay a lower price for them. The April 1325/1275 put spread is currently offered at 14 points, which has a cost of $700 with a $2,500 maximum profit potential, not including your commissions. I would hold this till almost expiration on April 18.
Phil Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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