What’s in Store for the Markets in May?
The stage was set for stocks to rally in early May after the Federal Reserve suggested at its April 29-30 policy meeting that the easing cycle that began after last summer’s subprime loan crisis may come to end, or at least, take a pause. The major stock market averages have been gaining lost ground on ideas the economy should start to recover. The Fed may have to turn to fighting inflation, which is putting a damper on consumer pocketbooks and the economic outlook. We’ve all seen the headlines about soaring food and fuel prices. I’ll take a look at a number of markets including stocks, bonds, the U.S. dollar, and crude oil. I’ll share where I think the markets may be headed this month, and offer some key technical levels I’m watching.
Equity Market
There’s been a lot of concern about whether or not we are in a recession, but the stock market’s recent behavior indicates things may start looking up. The slightly positive first-quarter gross domestic product reading indicates we may have dodged the bullet, at least by the classical definition. And the market seems to believe the Fed is done lowering rates, and a second-half recovery seems likely as the Fed’s prior actions work their way into the economy. After the late April Fed meeting, major market markets bounced back to levels seen in January.
Looking at the daily chart of June S&P futures, you can see the market has seen consolidation in April, with a slight bias to the upside. Don’t get me wrong—I’m not saying all our problems are over. There may be more skeletons in the closet, and we might see 1310 in the S&P again. Just look at the market action on Wednesday, May 7, where we saw a big intraday break from 1420 down to 1390. These knee-jerk moves will happen, but overall, things should stabilize and I’m bullish equities as a longer-term investor. I recommend buying dips, watch for the next big dip to 1360, or 1325 as a good spot to buy. I’m not worried about the market unless it moves under 1310. Then the recovery idea may be in jeopardy and we’ll consider shorting strategies.
If June S&P sees two days with a close above 1425 this month, that should set the market off and running into June and July. Closes under 1400 would indicate good bearish trade set-ups for short-term traders in the near-term.
U.S. Dollar
In April, it was a definitely a two-sided trade for the U.S. dollar, trying to recover from a long-running bear market. The first two weeks the dollar was down; the second two it was up. The June Dollar Index futures tested the low from March, and slipped a little underneath it. Similar to stocks, the Fed’s April meeting gave a shot of life to the ailing dollar. Investors in all markets should watch the dollar. Remember, many commodities are priced in dollars, and their bull run has coincided with the bear run in the dollar. I think there is a short-term bottom in place in the dollar, and that should cause a number of commodities to correct. It might take a few months, but the dollar trend should be turning up.
Looking at the U.S. June Dollar Index futures from a technical standpoint, we need close two days in a row, or on a weekly basis (Friday) above 74 to cement bullish momentum. Then I think 77 could be in view. Everyone is talking about the dollar and what it means to commodities, interest rates, and foreign investment. If the Fed has implied they are done cutting rates, and the soft patches in Europe trigger rate cuts overseas, the dollar should rally further. If the market continues in a trading affair and doesn’t break out above 74, I would recommend selling right before resistance at 74, and buying near 71.75. Bottom line--keep your eye on the dollar no matter what you trade.
In the euro, look for weakness. Closes above 157.50 would change my mind about the dollar/euro trend, and in that case, the Dollar Index futures should move under 72.
Crude Oil
Crude oil has been a huge bull market. As crude oil is priced in dollars, a move higher in the dollar should cause crude oil to back down a bit. That hasn’t been happening so far, however. Crude oil has had a mind of its own, shooting above $123 a barrel to a record high this month. We have a resource that is being depleted and prognosticators are saying we could run out, and investors are buying it up. Emerging nations like China and India are looking to use more and more. Goldman Sachs recently predicted crude oil would hit $150 - $200 within two years’ time. People laughed when their head trader had predicted crude would go to $100, when it was trading under $50. Now people are paying attention. The problem that hasn’t been taken into account is where is the price level where people say enough is enough? Apparently, we haven’t hit it yet.
Remember Hurricane Katrina, which sent crude oil skyward? After moving to $78 or $80 in the wake of the storm, crude oil then corrected back to about $50. Of course the market rebounded above those Katrina-highs, but as an individual trader, a buy-and-hold strategy might not be the wisest. Sure, you buy where the market is now at $123, but you may have to stomach a correction down to $95 or lower, before seeing $150 - $200 reached in months or years. That’s not the smartest way to approach trading, unless you are extremely well capitalized.
I ultimately think Goldman will be right in their crude oil prediction. Crude oil has been posting higher highs and higher lows, which is technically bullish. But some of the enthusiasm we have today just doesn’t mesh with current supply/demand fundamentals and its hard to believe we won’t see some type of pullback. During May, I think we may have some consolidation in commodities, including crude oil.
I ultimately think Goldman will be right in their crude oil prediction. Crude oil has been posting higher highs and higher lows, which is technically bullish. But some of the enthusiasm we have today just doesn’t mesh with current supply/demand fundamentals and its hard to believe we won’t see some type of pullback. During May, I think we may have some consolidation in commodities, including crude oil.
U.S. Treasuries
There has been a lot of flight-to-quality taking place in the Treasury market this year. I think there are too many longs in Treasury bond and note futures, and a correction in this market is also coming. I recommend selling rallies. If you look at a weekly chart of the Treasury bond futures, you see a double-top near 121. That's panic tied to subprime, as investors wanted to be in a safe vehicle. I thnk that is done, and the worst is over. I'd sell the June bond futures on dips. I still believe the second half of the year is going to improve, as I don't think most of the Fed's prior rate cuts have seeped completely into our economy. Use your charts to determine where to draw the line, where you enter and exit trades. See the big "M" on the chart below, which could be projecting a move to 106.
Keep in mind also, if the majority of the big fund participants that were on the sidelines are now back in equities, and fueling the rally, that’s going to bring bonds down. The mounting inflation we are experiencing should also be reflected in bonds, they should go down in price and up in yield.
If we see signs of economic weakness, or another disaster in the financial sector, the theme I have outlined here will change. Commodities should turn right back up and the dollar will resume its bearish trend, and stocks may struggle. For the month of May, money management is the theme.
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 hear an extended version of Jeff’s comments on which this article is based, including his outlook and technical levels to watch for other markets, in our webinar archive.
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.
Futures trading involves the substantial risk of loss and may not be suitable for all investors.
