Have We Hit a Bottom in the Stock Market?
by Greg Perlin
The stock market ended a dismal quarter on an upbeat note and started the new quarter with a strong breakout on Tuesday, April 1, 2008. The S&P 500 climbed over 40 points on Tuesday and held steady on Wednesday, trading near 1370 in early afternoon trading. I think the stock market looks fairly good going forward, and perhaps the bad news is out. I recommend buying S&P futures, and selling Treasury futures. However, I would stay tuned for the March employment report on Friday, which could set the tone for the second quarter in both equity and Treasury markets.
S&P 500 Futures
Monday, March 31 marked the end of the first quarter of 2008. During this time, the stock market dropped 9.9 percent, as indicated by the S&P 500. Tuesday’s broad market increase is giving some people hope that better things may be on the way.
June S&P futures rallied 2 ½ percent on Tuesday and it seems that the market is building a base. If you look at the chart below, you can see that the June S&P futures have been building a base since the March 17 low of 1253. Since then, the market has seen higher lows on a closing basis. Although last week (March 24-28) didn’t bode so well for the market, the market has been hanging in there for the last couple months, forming a base that could give strength to this market.
Despite the constant stream of negative news that has pushed this market lower, there are a few positive developments that may offer support. The biggest positive for the stock market could be the signs of a recovery in the U.S. dollar. A drop in the price of crude oil along with other commodities would ease inflationary pressures, another positive for the market.
The stock market also seemed to like U.S. Treasury Secretary Henry Paulson's announcement of a plan to overhaul the market’s regulatory structure. However, if the June S&P futures slide through 1255, the bearish first-quarter trend is likely to continue.
The March 2008 employment report, released on Friday, April 4, is going to be a key to market direction this week. An anemic number is expected (estimates are for a rise in 40,000 in non-farm payrolls), so if there’s a more positive surprise, S&P futures are likely to rally.
If June S&P futures can retest and hold the low from March 19 at 1297, I would recommend buying with a tight stop near 1278, the low March 18. Look for a possible continuation in this rally on a positive employment report, and/or a further rebound in the U.S. dollar and easing of inflation pressures.
30-year Treasury Bond Futures
Treasury bond futures have been coiling, and marking time before Friday’s employment report. If the Federal Reserve continues to lower rates, that will be negative for Treasuries. Any additional cut in interest rates could fuel another leg of the commodity bull run and further inflation pressures.
Treasuries are also being fueled by uncertainty in the credit markets. If the Federal Reserve continues to lower rates, that will be bad for the Treasuries because additional rate cuts could be inflationary.
If the stock market goes higher, as I’m expecting, it would be ideal to get on the short side of Treasury bond futures. When the stock market goes higher, more often than not, Treasury prices head lower. So pay attention to how the employment report and the Fed’s actions affect both markets.
Look for a cue that the dollar may be changing to a more bullish trend. Also keep in eye for news coming from overseas. The European Central Bank and Bank of England have been staunchly focused on inflation, and have not responded to economic weakness the way our Fed has with its aggressive easing moves. If the ECB and BOE start to show hints they are becoming more concerned about a global economic slowdown than they are about inflation, that’s a sign they might be poised to follow our Fed with rate cuts. That should be a cue the dollar has bottomed.
Everyone is talking about whether or not we are in a recession, and the jury is still out. But more concrete signs that the economy isn’t in a recession will prompt Treasuries to move lower, bringing yields up. We have so much negative news already in the market that we are bound to break the trend. A strong employment report could ease the recession talk. I recommend selling June Treasury bond futures near 119-19 and 119-20, which marks a double-top. Put a stop at the high from March 24 at 120-27, and look for a move down to 117-20, the low on Friday, March 28.
Of course, not every trade will work. But the way I approach trade set ups for my clients is to look for a good risk-to-reward ratio and a trade idea that works within each individual’s comfort zone.
Greg Perlin is a Senior Market Strategist with Lind Plus. He can be reached at 800-437-4189 or via email at gperlin@lind-waldock.com.
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