Yesterday was an inauspicious way to start the month of June with a loss of over 2% on the S&P 500. Normally I'd expect to see a host of values after a day like that, but looking underneath the hood of global markets, I'm just not seeing that many. I also have business obligations that will take me away from my trading turret Thursday making it more difficult for me to pinpoint favorable entries. For those reasons I'm not recommending at trade right now but let me share my thought process and watch list with you.

I'd like to see more relative value in small-caps and emerging markets as represented by the iShares Russell 2000 Index Fund (IWM) and the MSCI Emerging Markets Index Fund (EEM) respectively before becoming more constructive on the markets.

For traders looking for exposure here, the best directional trade I see right now is buying the Utilities SPDR (XLU). It sports a yield close to 4% which compares favorably with the 10-Year U.S. Treasury yield of just under 3%.

On a spread basis, three trades that might be interesting are buying the Industrials SPDR (XLI) and shorting an equal dollar amount of the S&P 500 ETF (SPY), buying the Financials SPDR (XLF) and shorting an equal dollar amount of SPY, and buying the Consumer Discretionary SPDR (XLY) and shorting an equal dollar amount of the Consumer Staples SPDR (XLP).

My crystal ball on the markets is cloudy right now. When that happens I try not to do too much and look for spread plays and special situations. Interestingly, looking at market history back to 2003, when XLI has offered value relative to SPY, the spread has made money because XLI broke even and SPY declined (you made money shorting SPY). I offer this in the vein of anecdote rather than rigorous analysis.

During the Futures 101 webinar, I discussed how margin increases can be anticipated by comparing dollar volatility to margin levels and using statistics to test a trading strategy. Two recent posts, "Statistical Value vs. Economic Value" and "Are the Exchanges Manipulating the Silver Market" at amplified those points.

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Tim has a B.S. in math from the University of Texas and a master's in statistics from Columbia University. He currently runs his own CTA after being a futures portfolio manager for several well-known hedge funds. Tim's foundational approach is that statistical trading must be grounded in financial and economic intuition. His writings are an exploration of both markets and quantitative methods.

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