For the mid-week ending October 28, 2015, the Dow and S&P 500 continued their rally after the FOMC on Wednesday (rebounding in the final hour of trade). In other news: U.S. GDP third-quarter is lower than expected; jobless claims rose lower than expected; and, consumer confidence shrinks in October.
After an initial plunge Wednesday in reaction to the hawkish FOMC announcement (which increased the possibility of a December rate hike), the markets rallied to a new intraday high by the close. In a nearly unanimous vote (9-1), the FOMC committee members held the benchmark rate at its current level but indicated that a December rate hike is still being considered. This hawkish statement sent the markets tumbling, giving mutual funds and money managers an opportunity to buy again on the dip. The Dow closed at its highest level since July, gaining 100 points for the day; the S&P 500 gained 24.5 points, with stocks in the Financials, Basic Materials, and Technology sectors leading the rally.
GDP is up only 1.5 percent (1.6 percent expected) after expanding 3.9 percent last quarter. Helped by domestic spending in the third quarter, final sales rose at a high of 3 percent indicating a there is an underlying momentum that could push fourth-quarter GDP higher. The Fed described the economy as expanding at a moderate pace in Wednesday’s FOMC announcement, which put a December rate hike back on the table (50 percent probability estimated). Consumer spending (3.2 percent growth this quarter) has been boosted by lower gasoline prices and firming housing and labor markets. The drag on economic growth has been a slowdown in imports and ongoing spending cuts in the energy sector.
U.S. jobless claims rose below expectations with an increase of 1,000 to 260,000 for the week, bringing the 4-week average to its lowest level since 1973. This is the 34th straight week that claims came in below the 300,000 threshold indicating a fairly healthy jobs market. And, the very low level of layoffs underscores the strength in the labor market. The 4-week average of claims fell 4,000 to 259,250. The claims report indicated that the number of people receiving benefits fell 37,000 to 2.14 million this past week ending October 17, the lowest since November 2000.
Consumer confidence retreats in October, according to the Conference Board’s Consumer Confidence Index. The index fell to 97.6 in October (103 expected) and below September’s reading of 102.60. Consumers are less positive about the economy, especially the job market. Those stating jobs are “plentiful” dropped to 22.2 percent from 24.8 percent; those stating jobs are “hard to get” rose to 25.8 percent from 24.9 percent. However, consumers still rate the current economic environment favorably while not expecting much strengthening in the short-term.
If you’re trading options, it is suggested trading Put credit spreads for the week at 1.75 standard deviations or greater. Expect the price of the SPX to fall within 2047 and 2134 (2 standard deviations) by this Friday.
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