In what could be termed perilous times to be a trader or investor, it is imperative, maybe now more than ever, to be able to ascertain what is truly driving the price discovery of a given market. Whether it be technical points of contention or fundamental developments, in a market that features a majority of algorithmically driven high frequency trading, one must have an idea that utilizes a steadfast game plan in order to have a qualified opportunity to achieve success in the commodity futures and options markets.
The S&P 500 (CME:SPU14) index has continued to show strength in the face of many different fundamental developments that have at one point looked as if they may derail the current bull trend. The possible end in sight of easy money (tapering of QE talk which started in June ’13 and will conclude at the current pace in October ’14) seemed to be what would scare investors away when first announced by then Fed Chief Bernanke. The S and P traded sharply lower at the mere suggestion that QE 3 had a shelf life looming putting the index as low as 1530 before rebounding nicely to achieve new highs.
Later, In September of ’13, S and P bulls rejoiced as the Fed opted to not begin the tapering process that analysts had assumed would occur. Further evidence of the S&P 500 ignoring normally bearish developments are plentiful as we have seen may armed conflicts, negative GDP, employment slack and political indecision all have little effect on the bull run. Fundamental analysis can be a difficult to wade through as the same information can tend to have unequal effects depending on its timing and market saturation.
The recent down trend in the S and P market has been attributed by most analysts as a reaction to the geo-political events currently dominating the news wire. Whether it is the Russian-Ukraine conflict, Israel’s march on Gaza or the latest U.S. bombings in Iraq, it appears that these events had finally cracked the bull market with a low in the high 1800’s last week.
However, there is a curious disconnect in the markets that would seem to dispel this theory.
The energy markets have failed to exhibit the qualities that one would expect when faced with the global events of late. In fact, we have seen all the energy markets trade lower as the foreign conflicts have swelled. Crude, gasoline, and even natural gas have all traded at or close to yearly lows following marked escalations on all three of the major conflict fronts globally.
Then, the fixed income market (ranging from fed funds to 30 year bond futures) have all traded higher in response to the escalation as one would expect yet have been failed to correct as we have seen the equities recover (at the time of writing the S and P futures were up 13 handles while the bonds were up 5 tics). If this reaction in the fixed income market was actually a flight to quality based on the down turn of the equities and the conflicts abroad, then one could reasonably expect a modest correction as a result of the equity ‘shrug off’ currently gaining traction.