A Positive Day for the E-minis, But Caution is Warranted

ESZ3 Daily 011013Good evening, Friends. As expected, institutions weren’t all that concerned about the Federal government shutdown, and the E-minis had a good day, finishing in the upper quarter of the day’s vertical bar. This generally points toward additional strength. One thing to keep in mind is that pension plan sponsors (both corporations and governmental entities) typically put additional cash to work at the beginning of a quarter. Money is distributed to their equity fund managers, who either buy stocks or, if they decide to wait for better prices in individual equities, futures. Consequently, there’s an upward bias at the beginning of a new quarter.

The first day of the shutdown wasn’t a big deal for the market, and there was the tail wind of new pension contributions to help it along. However, if days start to drag on without an agreement in Washington, and in particular, as October 17, when the Treasury estimates that the Federal government will run out of cash, approaches, I would expect investors to become increasingly cautious. This should be reflected in a rising put/call ratio and VIX, along with the related ETFs. I would also expect the Dollar to come under some pressure, and Gold to push higher if the market begins to sense that this is a real possibility.

As Todd has pointed out, we don’t have to worry about any of this if we’re day trading the E-mini or other equity futures contracts. Most of us, however, also have a portion of our portfolios invested in swing trades or income-generating strategies such as Iron Condors. The issues in DC may all be resolved quickly and elegantly, but there’s certainly a chance that will not be the case, which could generate a decent downdraft in stocks (and the Dollar). 

I’m going to be keeping a closer eye on yesterday’s intraday low in the E-mini, 1666.75. There is some potential support a bit lower, but if that level breaks, I’m going to be more careful in dealing with long positions, and probably lightening up, while looking to write more call credit spreads against stocks with charts that show signs of topping out.

The bias in this market has been higher for quite a while thanks in large part to the Fed’s support, and that now seems likely to continue, despite the “tapering” talk. Still, if a failure to raise the debt ceiling results in an inability on the part of the Treasury to roll over T-bills (because potential buyers won’t be assured of being repaid on time), things could get pretty scary. We can make a lot of money being short E-mini contracts intraday if that occurs, but it will be a lot more fun if longer term positions aren’t giving a lot of the gains back.

This isn’t a prediction; as always we need to take our direction from the price action, using the approach that Todd teaches. These potential catalysts are something to be aware of, however, particularly for those owning assets with longer investment horizons. Whatever happens, best of luck!


About the Author kevin


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