Spreads Based on Economic Trends

Spread timing can be based on economic fundamentals as well as on technical indicators (to be discussed next). As an example of economic conditions that might affect a spread, consider the fol­lowing scenarios and actions in SSF spreads that might have good profit potential:

•  You have reason to believe that the overall economy will im­
prove over the next six months. You can buy the nearby
month of GM (or other economy-sensitive stocks) and sell a
distant month of GM stock. If the stock moves higher, then
the front month will gain faster than the back month (e.g.,
March versus December).

•  You have reason to believe that the major stock market aver­
ages will turn bearish. You can sell short the front month of an
SSF and buy the back month of an SSF.

•  You have reason to believe that major stock market averages
will turn bearish. You can buy a precious metals SSF and sell an
industrial stock SSF (e.g., GM). As an example of this spread
see Figure 9.4. The chart shows Newmont Mining (NEM) ver­
sus Ford (F) as a spread. Note the large gain in NEM over F dur­
ing the period from April 2001 to June 2002 as the U.S.
economy contracted and stocks worldwide were on the decline.

I Technical Spread Indicators

Many technical indicators can be used in timing spread entries and exits. The more traditional methods, such as trendlines and moving averages, have distinct limitations (as explained in Chapter 8). One of the more effective indicators to use in futures trading, including SSFs, is the momentum indicator, or MOM, (i.e., the rate of acceleration of a price) and my adaptation of it, the momentum moving average (MOM/MA). If you are interested in the construction of the momentum moving average, I suggest consulting any of the leading books on technical analysis. Note also that most trad

9 / Spread Trading in Single Stock Futures 107

FIGURE 9.4 Newmont Mining versus Ford

stock market ~ stocks
investing in stock ~ investment banking
stock option ~ trading
make money online ~ money maker