For the mid-week ending February 17, 2016, the Dow and S&P 500 are up as crude oil prices rally. Wednesday’s rally represents the first three-day rally since last August that nearly wipes out the loss for the month; but will it last? In other news: the rally in crude oil is tentative; Fed minutes indicate a possible change in the schedule for rate hikes this year; and, industrial production rose greater than expected.
The three-day rally has the Dow up 3.0 percent (480 points) and the S&P 500 up 3.33 percent (62 points) nearly wiping out February’s losses. However, some analysts believe the rally will end soon characterizing it as a bear market rally. The expectation is that the S&P 500 will reach the 1,950 area and then establish an even lower low within a 10 to 20 percent correction zone. The primary cause for the rally is the preliminary accord among some major oil producing countries to freeze production levels, and the expected delay in Fed rate hikes this year.
The oil production freeze accord is tentative. While talks continue between major oil producers, it is not likely to end the glut of oil anytime soon, particularly since Iran has not agreed to anything. The surprise agreement that ignited the rally in oil is the possible deal between Saudi Arabia and Russia to freeze production levels. This is the first coordinated move to control supply since OPEC announced plans in November of 2014 to let the market set prices. While OPEC is not a party to this deal, some of its members are (including Qatar and Venezuela). OPEC meets in June, and some analysts believe it may agree to production cuts.
In its minutes, Fed policymakers are considering changing their planned schedule for rate hikes this year. This would occur if tightening financial conditions in the global economy impacts the U.S. economy. The Fed will closely monitor global economic developments in addition to oil and stock prices. Wall Street currently expects there will be no rate hikes this year, and places the probability of a rate hike in December at 40 percent.
U.S. industrial production rose far more than expected: 0.9 percent vs. 0.4 percent expected. This figure comprises manufacturing, mining, and electric and gas utilities. Utilities rose 5.4 percent (vs. -2.9 percent last month); manufacturing rose 0.5 percent; and, mining was flat. With output rising, the percentage of industrial capacity in use rose to 77.1 percent (vs. 76.4 percent last month). Capacity is viewed by the Fed as a leading indicator of economic growth.
If you’re trading options, it is suggested trading Put credit spreads for the remainder of the week at 2.5 standard deviations or greater. Expect the price of the SPX to fall within 1864 and 1991 (2 standard deviations) by this Friday.
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