Markets to Watch: S&P 500, Crude Oil & Corn
Last week, the Federal Reserve lowered the discount rate it charges banks to borrow money from them by 50 basis points to 5.75 percent. In light of this and other economic fundamentals, there are three very important markets you should be watching: the S&P 500, crude oil and corn. But before we look at these markets we need to know the reason for this cut and its impact on the markets.
Difference Between Fed Funds and Discount Rate
Although most people often focus on the Fed Funds rate, the discount rate is not the same. The discount rate is the rate that banks can borrow from the Federal Reserve itself. Meanwhile, the Fed Funds rate is the rate banks charge each other for borrowing bank-to-bank. Currently, the Fed Funds rate is 5.25 percent and the discount rate was lowered to 5.75 percent from 6.25 percent.
What does last week’s cut in the discount rate mean? By cutting the discount rate the Federal Reserve is telling the world that it is watching the markets and it is ready to act when action is needed. Instead of bailing out hedge funds or sub-prime lenders they are going to make sure that credit worthy institutions will get the money they want through the discount window to provide liquidity in the markets. So if banks won’t lend to other banks, the Federal Reserve will. The stock market took this favorably and has rallied on the news. The move is not going to save the markets, but it does help.
S&P 500
Last week, the September S&P 500 futures contract was as low as 1375 intra-day on August 16 and climbed nearly 100 points to as high as 1469 by the next day August 17. This move was largely due to the cut in the Federal Reserve discount rate. A move like this sometimes doesn’t happen during an entire month.
The stock market continued its comeback on Wednesday, August 22, 2007, and this morning, things are still looking up for stocks. Investors are breathing a sigh of relief after Bank of America came to the rescue of Countrywide Financial with a $2 billion injection, and amid optimism, central banks will act to reduce further damage from credit-market woes.
The question now is do we have a bottom in, or not? September S&P futures closed higher Wednesday, and above its 20-day moving average of 1459. From a technical standpoint, that suggests a short-term bottom. Momentum indicators, the stochastics and the relative strength index (RSI) have turned bullish, and this opens the door to a possible rally to 1509. A close under Monday’s low of 1434 would temper the near-term bullish outlook.
My pivot point for this week on the S&P 500 futures has been 1432. Any close above the weekly pivot point is considered bullish and anything below is bearish. Our first resistance point (R1) is 1490 and our second resistance point (R2) is 1530. Our first support point (S1) is 1392 with our second support point (S2) being 1334. In this market you need to bear at least 7-9 points of wiggle room for the weekly pivots.
Crude Oil
Last week, there were several stories that made crude oil jump. Hurricane Dean’s approach and a tropical storm that was set to hit the Texas coast both helped push crude oil higher. In addition to this, weekly oil inventory numbers showed that we had less crude oil than we thought. The market did eventually pull back because of the stock market slow-down which could lead to a reduced demand for crude oil. This market is still more volatile than the S&P 500 and should be approached with strict money management principles in place.
I think crude oil is still in a bull market and my weekly pivot point for the October futures contract is $71.93. Our major support (S1) for the week is $69.86 with S2 = $67.90. On the upside I see resistance (R1) at $73.88 and R2 = $75.95. In the crude oil market you should allow 40-50 points of wiggle room when trading.
Corn
I’m bullish corn for reasons based mostly on demand. Goldman Sachs and other Wall Street firms are telling their clients to buy corn. According to a Bloomberg report, agricultural products are more likely to withstand a global economic downturn because people still have to eat. Consumers in China and other emerging economies will continue to upgrade their diets despite turmoil in U.S. sub-prime markets. In fact, the bull market of the last few years was probably fueled by China. Jim Rogers, the former hedge fund manager who started the International Commodity Index, mentioned that even if the United States has a downturn, 3 billion Chinese people will continue upgrade their diets and eat more.
If we compare crude oil and corn prices over the five years we’ll notice that crude oil has almost quadrupled in price from $20 to nearly $80 recently. In 1999 we were near $10 a barrel. Compare that to corn. Over the last 5 years corn has barely doubled from about $2.00 a bushel in 2002 to just under $3.50 today. Isn’t food more important than transportation? Why hasn’t corn quadrupled in value?
All I know is that there are more people on this planet today than ever before. Demand for corn will increase. I remain bullish on corn. My weekly pivot point is $3.43 with the following support and resistance points: S1 = $3.29, S2 = $3.12, R1 = $3.60, R2 = $3.75. In the corn market, it would be a good idea to allow for 5 to 6 cents of wiggle room while using these pivots.
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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.
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