Futures Forecast for July
Many of the big-picture themes holding back the economy from earlier this year still haven’t been resolved, and I don’t see them being resolved in July either. So it could be another difficult month for stock market investors, and cash-strapped consumers. Let’s take a big picture view of the markets and economic environment for the month of July as we head into the second half of the year.
S&P 500
The stock market has had problems since the start of last year’s subprime meltdown, and although many analysts had hoped they might have worked their way through the markets by now, they are not going away peacefully. As losses for the year in the major market averages hit the double-digits, talk has intensified about a bear market being upon us. Bear territory is generally viewed as a 20 percent retracement from the market’s highs, and we’re on the brink of it. The S&P 500 is now down about 19 percent from its October peak and down about 14 percent for the year. The Dow Jones Industrial Average meets the definition, crossing into bear territory on July 3, 2008, with a drop of just over 20 percent from its record close in October.
To put this year in some perspective, take a look back a few years, and you’ll see what a real bear market looks like. I will show a monthly chart going back to 2000, when the S&P 500 moved from 1500 to 800 in about two and a half years--now that’s a bear market. You can see how the market recovered as interest rates eased and the housing bubble began growing.
S&P 500 Monthly Continuous
The volatility we’ve been seeing in the past 6-7 months that stemmed from last year’s subprime meltdown is no more or less volatile than the events of that period—the bursting of the dot.com bubble, Enron, or 9 - 11. History does tend to repeat itself when it comes to market cycles, albeit with different labels. We had an Internet bubble, and then we had a real estate bubble fueled by cheap money and easy lending. The banking system should’ve known better than to support the housing bubble, and now the financial industry is in distress. I am still optimistic the market will right itself before the end of the year, although the S&P could certainly fall another 200-300 points first. If I thought we’d be attacked, or World War III was coming, or something of that magnitude, then the S&P could hit 900. But I don’t see a disaster; just lingering economic malaise. A few months ago I had said I expected the market to be down about 15- 20 percent, but by year-end, the market would rebound and losses would be in the single-digits for 2008. I still see that likely, and the year should end with about an 8 percent decline for the S&P. What I am certain about is that this market will remain volatile.
A few months ago I also mentioned stagflation, which is a situation of lower growth, and rising inflation—the worst of both possible worlds. So far, we have not had two quarters of negative gross domestic product, which is the technical definition of recession. So far, we’ve averted recession (even though you may personally feel we are in one). Inflation will be difficult to control, and averting stagflation equally troublesome. The Federal Reserve can raise interest rates to combat inflation, or lower them to stimulate growth. These are conflicting aims in the environment we are in. Heading into the July 4 holiday break, we got more sobering news on the job front, with a drop in 62,000 non-farm payrolls in June. For the first half of 2008, that brought the tally of total job losses to 438,000. Jobs grew 91,000 on average per month in 2007.
I see the negative economic situation continuing in July. Rallies will likely be feeble in stock indexes, and a bottom won’t be in yet this month. Until we see a trend change in the dollar’s longstanding bear market, my thought is to buy commodities and sell stock indexes. Remember though in summer we often have lower volume, so trends might not be explosive. We also could get some short-term corrective moves up for stocks. Look at financial stocks as a gauge of our economy, as they’ve been leading the way lower. In the S&P futures, watch 1335 in the September contract. A close two days in a row or on a weekly basis above that level, and I think the bulls would regain some control. The market will go from negative to neutral in that case. When there are problems with the stock market, people look for alternatives, and flock to safe-havens like Treasury instruments and gold.
Inflation
Of course commodity inflation is generating headlines as food and fuel prices surge. In my opinion, I think prices may ease after the summer Olympics. China is likely stockpiling commodities ahead of the Olympics, including construction materials to build infrastructure, and food and fuel for athletes and visitors. I think China had to buy at any price, but that should ebb somewhat once the Olympics end. China is like the girl going to the prom and wants to look good to the world in her pretty dress, and is spending for the big event. Of course, there will continue to be demand from China and other emerging countries after the Olympics, but there won’t be a deadline associated with it, and the need not likely so urgent.
You can see what I’m thinking if you look at a chart of September heating oil and compare that with gasoline futures. Heating oil (used for diesel fuel) went up more than 1,400 ticks on July 2, 2008—that’s just one day alone. A vicious move. The August contract moved to a record $4.0925 a gallon to break though an old triple-top, and was up more than 3 percent on the day. That move was even more intense than crude oil. Heating oil was up almost three times as much as gasoline, which didn’t even make a new high. Heating oil is something which China needs more than gasoline to run generators, equipment, and diesel-engine automobiles. They are buyers, in my opinion, and that’s how I view these moves. They have an emergency due date this summer. When that’s over, they’ll still have a solid GDP, but will likely take steps address inflation like the rest of the world, and slow their economy.
September Heating Oil Futures Daily
September Gasoline Futures Daily
Other parts of the globe have been more focused on fighting inflation than we have in the U.S. The European Central Bank has made no bones about their stance on inflation, which has risen across the euro-zone to 4 percent through June, the highest since January 1997. Unlike our Federal Reserve, the ECB has not been cutting interest rates in the past year, and decided on July 3, 2008, to raise they key rate to 4.25 percent despite slowing growth. Our key short-term interest rate stands at 2 percent.
The direction of interest rates in the euro-zone will have a bearing on the U.S. dollar, particularly because the Fed is likely to itself turn to inflation-fighting in coming months and should begin raising rates. Further pressure on the dollar will likely reignite the commodity boom, because foreigners have more purchasing power. Watch the September U.S. Dollar Index futures. If the market can’t muster a break above 74, the dollar is still in a hugely bear market.
Crude Oil and Grains
Tensions in the Middle East and a decline in U.S. stockpiles in the latest weekly report pushed August crude oil to a new record above $144 a barrel before the July 4 holiday break. A week ago, this market was at $132. A $12 move in just five days is pretty amazing. Even more amazing, in 18 months, this market has gone up about 200 percent. There will be excruciating pain on the world if crude oil makes it to $200. We’ve had continued discussions among market participants, regulators and politicians this past month about what’s causing crude oil to move so far so fast. Some say it’s the natural forces of supply and demand, while others blame speculators. Last month, I said to watch for any official policy measures to attempt to curb crude oil, which could impact trends in a number of markets. The jury is still out on the issue, and so far, no official measures have been enacted. Maybe the conclusion will be speculation is not the culprit. Maybe it’s just the dollar, interest rates, and supply and demand.
You do want to watch for a possible shift in trend for crude oil at these record levels. I think first the market has to break $140 to mark the start of a short-term trend change, then $136, and then $130. From there, watch $122 and $111 as downside targets for a bigger move. But as I’ve said time and again, watch the dollar too for shifts in trend.
Grains markets have also seen dramatic increases, surging amid the spring Midwest floods. Corn’s bull run has also been driven by increased demand tied to ethanol for fuel. While the markets have seen a pullback this week (corn traded down its limit), I still think the bull market still lives with grains. It’s not done. I think the flooding did more damage than the USDA said in its latest report. Watch $7 a bushel in corn as a pivot for the December contract. If the market heads under $7, then I’m wrong and the top may be in. In December soybeans, watch $14.75 a bushel. A move under that level marks a likely shift in the bull trend.
Please feel free to call me to discuss these or other markets, and to incorporate specific trading strategies for your account size and risk tolerance. 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.
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