A Market Review and Opinion Report For December 5, 2011

[jmound]

This week is a relatively quiet report week (see economic schedule at the bottom of this report), with the focus leaning more towards foreign affairs. Sunday’s move by Italy to pump $30 billion euro into their economy will probably give some false hope on Monday that this week of European crisis talks might end well. Monday’s meeting between France and Germany sets up a Friday summit that should not provide the all-important effort that will support the euro from its downward spiral. For me, the bottom line is that Germany must decide if they are willing to destroy their relatively sound financial structure to help a destined-to-fail euro currency, and summits like the one coming up on Friday create opportunities for Germany to continue to create space between them and the other EU nations so when the euro breaks they have mitigated some of the fallout for themselves.

The stock market has made a dramatic recovery but is quickly facing critical resistance near the highs of its recent move – highs that I believe should hold. Along with that rally the U.S. dollar pulled back, albeit relatively little compared to the move in the stock market, and is offering a congestion period buy. The WASDE on Friday should provide a catalyst to further selling in grains, coinciding with weakness in commodities following a tough week of Euro panic.


S&P500

The S&P has formed a nearly perfect v-shaped recovery on a deep selloff that occurred just over a week ago. The market was up approximately 10% in a week, a truly astounding move that has occurred infrequently in history. Last Friday’s market reversal off the perceived bullish employment report is indicative of the change in market sentiment. Somehow, some way, the market has begun to realize the obvious – that it is not the center of our world but rather how the world impacts us that our egocentric minds should now accept. The reality is our employment is only a measure of our economy and our economy is only a measure of the world’s demand for goods and services as compared to available supply. This means if any major component of the world economy, namely the EU, is in financial ruins then so goes the rest of the world and our economic outlook. So the focus turns this week to crisis talks in Europe, perfectly timed to the market’s technical resistance near the highs of this multi-year rally off the historic lows set in 2009. It is not often that a daily, weekly and monthly chart offers such dramatic technical resistance indicators simultaneously while heading into a fundamental event. Puts and short futures are both recommended, but a futures play here allows for an immediate impact on market selling off technical resistance. The 10% rally and previous strong market declines have pumped up the VIX a bit and options are less of a value than a few weeks ago, making a futures play a bit of a stronger approach. A stop on the futures could theoretically be placed tighter at 1271 but for the difference in point risk I feel it is worth affording the market the opportunity to take the highs out before jumping ship on a short play.

Past performance is not indicative of future results.
Charts courtesy of Gecko Software's TracknTrade

Soybeans

Grains have already turned trend bearish and the retracement in beans has already impacted the market with about a 25% pullback since September. Last week’s stock market rally helped boost core commodities, but beans lagged with under a 3% bounce, indicating a general lack of buying interest. I believe the market has the potential for another 10% selloff this month and see Friday’s crop and WASDE reports as a catalyst to the next round of selling. A short term option play here gets close to the market with nominal premium paid. The strategy would be to position short term with a put play that captures any near term downside, with the full intent of playing a longer term position after this short term play if the market goes against the trade. In general I feel a short term option play near the money can grab immediate moves but can actually hedge the entry price of a longer term trade that you are seeking an entry point for – pay 8 cents now to try to capture near term downside and if you do not get it then you likely will see a higher entry price opportunity for a longer term play.