Geopolitical Events and Stock Index Futures

December 04, 2009

Name: Alan Bush

Company: Archer Financial Services

Years Trading: 32

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Last Friday there was a substantial downdraft in stock index futures on reports that two of Dubai’s largest companies could default on their debt. Dubai is one of the seven emirates of the United Arab Emirates and is located south of the Persian Gulf on the Arabian Peninsula. Some analysts were calling the Dubai financial crisis the “son of subprime,” which makes reference to the root cause of the global bear market for stock index futures that started in 2007 and lasted through the first few months of 2009. Dubai said the government would not guarantee the debts of Dubai World, who had overall liabilities that totaled almost $60 billion, including those of units that were not part of the restructuring. Dubai asked for a six month repayment freeze on debt issues by Dubai World and its Nakheel Construction subsidiary, which are state conglomerates. Subsidiaries of Dubai World developed three palm-shaped island properties that attempted to lure wealthy expatriates and international celebrities. This default news was a wakeup call for investors who learned the hard way about the default risks of “quasi-sovereign" lending. Foreign banks and international investors lent the Dubai government-linked firms large sums of money on the implicit understanding that they were backed by the United Arab Emirates. We now know that there was no government guarantee.

WHEN CHART SIGNALS FAIL

Financial markets reacted violently to the Dubai default news, especially the December S&P 500 futures, which very quickly fell below the 1082.50 - 1083.50 double bottom pattern. The likely substantial amount of resting sell stops under this double bottom “support area” were hit, which accentuated the decline. The low for the day came in at 1067.00. The first clue that this double bottom breakout to the downside could be a false one was when futures were able to recover and close above the original double bottom sell area. The validity of a technical sell signal is often confirmed by a close that is near the low price on the day that the sell signal took place. Neither of these confirmations of the technical sell signal took place, including the fact that the futures price closed well above the sell signal area. The December S&P500 futures were able to close at 1089.50, which was near the middle of the day’s range. The lack of follow through to the downside must have dismayed the bears.

December S&P500 Futures – Daily

OPPOSITE REACTION TO NEWS

Another sign that the sharp move to the downside would not continue was the fact that the market was able to fall for only one day. In fact, the market was down for not even a full day. The lack of follow through on the Dubai default news appears to be a classic example of the “opposite reaction to news indicator.”
Anytime a market is able to advance or under react to bearish news it is a sign that prices are likely to move higher. By the same token, it is a sign of weakness any time a market is able to decline or under react to bullish news. In fact, since early March of this year, we have seen a pattern where bearish news has usually been ignored, as futures prices continue to advance. Currently the “opposite reaction to the news indicator,” is telling us that higher stock index futures prices lie ahead.

CONCLUSION

The “failed chart sell signal” indicator and the “opposite reaction to news” indicator have given us the latest indications that this bull market for stock index futures will continue. In the present environment, it is likely that chart sell signals will fail and should be viewed as buying opportunities. In a bull market bearish geopolitical events, such as what we have just experienced in the Dubai situation, should also be viewed as opportunity to buy on weakness.

In addition, our most recent fundamental analysis suggests that we can expect a strengthening economy with accelerated growth as we move into next year. This anticipated economic recovery and bull market for stock index futures should be a multiyear event.

If you have any questions or comments about this article, please contact Alan at 1.800.243.2649 or send him an email to alan.bush@archerfinancials.com.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.

About the Author

Alan Bush has been a commodity analyst since 1976 focusing on the fundamental and technical aspects of stock index, interest rate and foreign currency markets. He has authored several articles for Stocks Futures and Options magazine and produced the “Futures Tech Focus” program, which is a technically based market outlook.

Alan served on the faculty of Oakton College as instructor of a course entitled, “Principles of Technical Analysis.” He has been interviewed on many national television programs, appearing on the Nightly Business Report, CNBC, CNN Moneyline, Reuters Television and Web FN. In addition, he has been frequently quoted in The Wall Street Journal, USA Today, The Bond Buyer and the Chicago Tribune and has been regularly interviewed on Chicago’s WMAQ radio business reports.

Alan can be reached at (312) 242-7911, or via email at alan.bush@archerfinancials.com.