For the mid-week ending May 27, 2015, the Dow and the S&P 500 rallied on Wednesday, recovering nearly all of the loss on Tuesday. Comments from Fed Chairperson Janet Yellen last Friday, along with an increase in the core consumer price index, has the markets anticipating a rate increase late this year (as opposed to next year). In other news: the Greek bailout agreement appears to be moving forward; and oil still at risk of geopolitical turmoil.
Economic news last week impacted the markets on Tuesday as the Dow and S&P 500 dropped over -1.0 percent. Also, concerns over the Greek debt crisis added to concerns that made exposure to equities more risky. Upbeat economic news on Tuesday led investors to believe a Fed rate hike will occur in September of this year, and not early next year: the consumer confidence index rose to 95.4 (from 94.3 in April), exceeded expectations; an increase in the sales of single-family homes of 6.8 percent, exceeded expectations; and a rise in the Case-Shiller 20-city composite index of 5 percent year on year, exceeded expectations.
News on Wednesday that Greece intends to have a deal by Sunday allowed the markets to recover nearly all of the losses on Tuesday. While creditors are skeptical, if a deal is reached it will allow Greece to obtain much needed funds to avoid a default; on June 5, Greece will need to pay the IMF 300 million euros. But the creditors continue to insist that Greece take measures to ensure a reformed economy, a sticking point for the government that has vowed to save pensions and civil servant salaries.
Oil prices plummeted due to the deluge of U.S. shale oil over the last several years, and the decision by OPEC to let oil prices drop. But unanticipated geopolitical events can cause oil prices to move in either direction. Several recent events have caused oil prices to fluctuate: a fire on an oil platform in the Gulf forced a shutdown; the rupture of the Plains All American pipeline in Santa Barbara; an airstrike by the eastern government of Libya on a oil tanker; rebels in South Sudan targeting its oil fields; a labor strike by Nigerian oil-tanker drivers; forest fires in Canada forced the shut-down of oil sands operations of Cenovus Energy Inc.; and Chevron taking a major field off-line in Kuwait. Generally, such events would cause spikes in the price of oil, but with the current supply glut, the impact has been minimal.
If you’re trading options, it is suggested trading Put Credit spreads for the remainder of this week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 2083 and 2145 (2 standard deviations) by this Friday.
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