Eyeing the Future of the S&P Futures

 | Dec 28, 2011 | 2:30 PM EST
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"You can observe a lot just by watching." -- Yogi Berra

If you shift your eyes back to Dec. 31st, 2010, you'll notice that the S&P Emini index futures closed the day and the year at 1253.

Now, I find it more than a little amusing that as I type up this article on Dec. 23, 2011 our primary area of interest on the Es for the regular session is, and this was not planned, 1253. So, while the path between point A and point B may have been a bit bumpy, the S&P futures have gone absolutely nowhere over the past 12 months.

Consider for a moment what has transpired over the past 12 months. We've witnessed extreme upheaval in places like Syria and Libya. We've endured endless demonstrations from angry and frustrated Americans under the banner of Occupy Wall Street. We've stared at our television sets in horror as a crushing Tsunami, triggered by a massive 8.9 earthquake, slammed into Japan. In additional to the horrific wall of water that killed thousands of Japanese citizens, panic set in as the world learned of a potential nuclear disaster at the Fukushima Daiichi plant.

As a country, we breathed a giant sigh of relief when, on May 1, President Obama informed us that Osama bin Laden had finally been killed. Again, as a country, we cried when news surfaced that a U.S. military helicopter carrying a number of Seal Team 6 members (the elite fighting force that killed Osama bin Laden) had been shot down.

Thanks almost entirely to Congress's inability to strike a long-term debt reduction compromise, on Aug. 5 Standard and Poor's downgraded the US sovereign debt rating from AAA to AA+. US equity markets put in a short-term bottom two days later at Es 1077 (during the overnight Globex session). Looking beyond our shores, nary a day has gone by over the past few months without the words "Europe" and "debt crisis" being mentioned numerous times. As 2011 comes to a close, traders continue to question whether or not the euro (as a currency) and the euro zone (as a collective group of countries) can survive over the long term. Despite all of these, and no doubt countless other seemingly insurmountable obstacles, our equity and debt markets opened on time every day during 2011 and did not fall into an unending and murderous black hole.

Looking to 2012

"The future ain't what it used to be." -- Yogi Berra

I am not an astonishingly bearish trader or investor, but I am of the opinion that volatility will remain elevated throughout 2012 and while the S&P Emini futures will endure both crushing defeats and stunning victories, when it's all said and done and we're performing a similar review at the end of 2012, the Es will be printing closer to 1125. That's right. I believe the Es will finish 2012 roughly 10% lower than where it is currently trading.

I have listed below what I believe traders might see unfold in the euro and Emini futures markets, as well as in the arena of US presidential and congressional politics.

The Euro Futures

Traders of euro currency futures begin 2012 by hammering the contract down toward 1.26, but just as folks in the media begin reading the currency its last rites the contract embarks on a scorching rally back toward 1.3830. The currency continues to confound traders by reversing course, and by late summer is threatening to break beneath 1.26. At some point during the year, the euro futures contract test 1.15, a level not seen since November 0f 2003.

The S&P Futures

The seemingly random volatility that index traders have experienced during the second half of 2011 continues throughout the entirety of 2012. Despite a relatively strong finish in US equity markets for 2011, an early year scare in the euro currency triggers a selloff in the S&P futures down toward 1125, but just as the financial media begins to panic over a large scale meltdown in the US markets, the S&P futures stage a miraculous rebound and trades as high as 1307-1327. The early to mid-year bullishness fades during the summer of 2012 as fears of a US recession reemerge. Said fears drive the S&P futures as low as 1060, but by year end we're trading back above 1125.

Congressional and Presidential Politics

Within the first two months of 2012 it becomes readily apparent that congress is unwilling and incapable of reaching a compromise as it relates to taxes and entitlements. Public anger over a do-nothing congress results in widespread calls for congressional term limits, and despite arguments by career politicians that term limits would result in the termination of both effective and ineffective politicians, a vote is held and term limits (of a maximum of 8 years) are imposed.

Despite Newt Gingrich's surge in popularity over the past month, the republican nomination goes to Mitt Romney. In a surprisingly close election, Mitt Romney defeats President Barack Obama and becomes the 45th President of the United States.

I want to take this opportunity to wish all our RealMoney readers, contributors and editors great success and abundant health in the coming year.

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