A Summer Stock Market Correction May be Coming

By Phil Streible

The stock market has rallied seven of the past eight weeks, is up more than 30 percent since March, and the S&P 500 is now mildly in the positive column for 2009. Optimistic comments from Federal Reserve Chairman Ben Bernanke and reports on home sales and manufacturing in China this week have boosted confidence the global recession is easing.

However, there are technical signs the market’s run may be losing some steam, and a correction would be a healthy occurrence. Momentum indicators are showing the market is looking toppy and overbought. And as the stock indexes have been churning higher, volume has started to slow. That’s a classic technical sign that the market could soon pull back—the volume should track the trend. I see stocks trading in a range between 950 – 660 as summer unfolds.

I recommend a spread in the E-mini S&P 500 futures to set up for a possible pullback which could take the front-month futures to 750. Consider buying the August 880 E-mini S&P puts, and sell the 780 puts. The cost of this trade is currently just over $1,600, and your maximum profit potential would be $5,000, less what you paid for the options and your commission. Breakeven is at a market price of 846.75, and your maximum profit potential would be realized if the S&P futures are at or below 780 at expiration. These options expire on August 21.

In my opinion, this strategy offers a good risk-reward ratio.

Feel free to contact me with any questions you have about the markets, or to discuss a customized trading strategy to suit your particular account size and risk tolerance. Ask about our half-off commissions offer for new clients.

Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.

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