For the mid-week ending April 20, 2016, the Dow and S&P 500 continue to climb. Both indexes rallied as oil prices stabilize and the dollar remains low. In other news: U.S. housing starts plummet; existing home sales rebound; and, the markets wait to hear from Draghi on Thursday.
The U.S. stock market is approaching record highs. After its poor performance at the beginning of the year, the stock market has rebounded sharply and is poised to reach its all-time highs (despite poor corporate earnings performance which has been down for the last six quarters). What’s driving the markets? China, oil prices, and the U.S. dollar. China’s economy appears to be responding to its economic stimulus plan, with exports up 11.5 percent. Oil prices have stabilized around the $40 per barrel level. And, the U.S. dollar index shows a drop in the dollar relative to other currencies by 5 percent; this will improve exports. The combination of the three (China, oil prices, the dollar) will help bolster corporate earnings in the next quarter.
Housing starts in the U.S. were below expectations. This indicates a cooling in future home construction. Housing starts totaled 1.09 million (1.17 million expected), with groundbreaking declining 8.8 percent (the lowest level since October). However, housing market fundamentals still remain strong due to a resilient labor market. First quarter GDP is now estimated at 0.2 percent annualized rate.
Home resales rebounded more than expected. The National Association of Realtors said Wednesday that sales surged 5.1 percent to 5.33 million units (3.5 percent expected). Again, this is due to the growing labor market which has accelerated household formation. Home prices have risen 5.7 percent (from a year ago) to an average price of $222,700.
ECB President Mario Draghi will be speaking on Thursday at the post-decision press conference. He is likely to be addressing three issues: first, the impact of negative interest rates; second, are additional stimulus options being considered; and third, what is the ECB’s forecast for longer-term growth and inflation. Since Draghi’s last speech on March 10, economic and financial conditions have improved. Leading growth indicators (PMI, retail sales, CPI) indicate solid consumption growth. As a result, the ECB is not expected to add more stimulus.
If you’re trading options, it is suggested trading Put credit spreads for the remainder of the week at 1.75 standard deviations or greater. Expect the price of the SPX to fall within 2061 and 2145 (2 standard deviations) by this Friday.
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