What Should You Be Trading This March 2008?

Let's look at what we know so far...
The Down Jones Industrial Average (DJIA) is down 7.5% for the year.
The Nasdaq is down 14%
The S&P 500, the top 500 stocks in the country, are down 9.4%.
Just to break even for the year, forget a profit, look at how far they must come back up.

March is generally a good trading month. Since 1945, stocks have shown gains in March 66% of the time. The average increase has been 1.05%, according to Sam Stovall, chief investment strategist at S&P, Inc. For March to ge a good trading month for you, you'll need to find a market niche that can give you better than average returns. The key is, which stock market sector(s) will give you such a return?

Look what happened the last week of February. The first 2 days were up. The rally was based on the viewpoint that the worst of the sub-prime credit crunch is over for financial institutions. Wednesday, the rally ran out of steam. Thursday and Friday brought back new worries about the financial sector, with UBS Bank announcing that the sub-prime credit crunch could go to $600 billion, not $400 billion as projected earlier.

And there are new worries...the U.S. Dollar continues to retreat and there is a steep rise in commodities, with Gold rapidly approaching $1000/ounce and crude oil prices jumping to $103 a barrel.

So which stock market sector(s) can give you a positive return?

The answer may surprise you...it is not a stock sector at all. You need to learn to trade the Futures Market. The Futures Market is the only Market that has not been negatively affected by the sub-prime credit crunch. That is because the Futures Market takes advantage of price movements, whether the price goes up or down. You need to learn to trade the S&P 500 E-Mini Future.

How are large institutions and hedge funds protecting themselves in this downturned market? They are trading S&P 500 Futures contracts. This way they do not have to invest in any single company. They can trade all 500 in one instrument.

Individual investors cannot trade the S&P 500 Future, so the Chicago Mercantile Exchange, the CME, created the S&P 500 E-mini Future contract. This is a mini version of the S&P 500 futures contract traded by large institutions. The S&P 500 E-Mini Future follows the larger S&P 500 the institutions trade. When the S&P 500 contract goes up, the E-Mini S&P 500 goes up as well.

In this downturned Market, the large institutions are able to capitalize by shorting. You can learn to short the S&P 500 E-Mini as well. An investor who sells S&P 500 E-mini futures "short", borrows contracts from his brokerage house and sells them to the exchange. He does this because he thinks the Market is going down. Eventually he will close out the position by buying back the contracts and returning them to the lender. Note: this is all done electronically. The investor does not telephone the broker to borrow the contracts. He just pushes a button on his trading platform. So long as the investor has an agreement in writing with his broker that he may short, he just needs to push a button.

Here's an example. You sell short 10 S&P 500 E-Mini contracts at $1350 a contract because you think the Market is coming down. The price of the S&P 500 E-Mini contracts goes to $1348, a $2 or 2 point reduction. For every point you earn $50 / contract. You shorted 10 contracts, so 10 X $50 X 2 points = $1000.

The E-mini S&P 500 Future contracts are an excellent potential for individual traders. The margins for trading the E-mini S&P 500 Future contract are generally $400-$500 per contract. For the 10 contracts, you would need $5000 in your futures account. Say you make 1/2 point / day, not 2 points, just 1/2 point, or $250. That is a 5% return on investment daily.

So if you are tired of investing in stocks that continue to go down, if you are tired of watching your mutual fund value reduced by the sub-prime credit crunch, you should be investing in S&P 500 E-Mini Futures.

If March ends up like January and February, trading S&P 500 E-Mini Futures is your best protection against the declining Market. And if March ends up 1.05% higher, you will still win. Instead of shorting futures, you will buy them. Either way, you'll be able to earn your 1/2 point daily.

Barbara Cohen is the CEO of Pure Reason, LLC., the parent company of Shadowtraders.com. She has been a professional daytrader for over 10 years. She can daytrade stocks, options and futures but she now expressly trades the S&P 500 E-mini, the 10-Year Treasury Note and the 30-Year Treasury Bond. | All three Futures are offered through the Chicago Mercantile Exchange (CME). Barbara has trained hundreds of students to trade the Futures Market with Shadowtraders' online trading strategies. Barbara frequently hosts the daily online trading chatroom offered by Shadowtraders.com to its traders. | Article Source: http://EzineArticles.com