For the mid-week ending January 20, 2016, the Dow and S&P 500 are down sharply as crude oil prices continue to drop. Wednesday’s roller coaster ride saw a huge move down in the stock indexes before recovering. In other news: inflation falls on lower energy prices; U.S. housing starts fall in December; and, the Supreme Court could strike a blow for unions.
The sell-off in the markets yesterday was huge before recovering around half the loss. The Dow was down over 550 points before recovering the last 90 minutes of trading, closing -1.6 percent (down 249 points); the S&P 500 slid -1.2 percent. The cause is considered now fear based selling as oil prices continue to head south. Currently, the markets (including oil) have shown little evidence of bottoming.
The U.S. Consumer Price Index (CPI) declined unexpectedly. The CPI decline -0.1 percent in December (0.0 percent expected) primarily due to a drop in the cost of energy goods. Despite the drop, the CPI has increased 0.7 percent over the last 12 months through December (the biggest increase in a year). The core CPI (less food and energy) edged up 0.1 percent rising 2.1 percent over the year through December. With the financial markets tightening, economic growth slowing, and inflation well below the Fed target of 2 percent, it is less likely that another Fed rate hike will occur in March.
Housing starts and permits fall in December. After considerable gains in November, the decline in housing is raising concerns over the health of the economy (housing is a leading indicator of economic growth). December saw a drop of -2.5 percent to a seasonally adjusted pace of 1.15 million units (the ninth straight month that starts were over 1 million). Building permits fell -3.9 percent to a 1.23 million-unit rate (after two months of healthy gains); permits for single-family homes rose 1.8 percent while multi-family homes dropped a whopping -11.4 percent.
The Supreme Court seems poised to strike a blow to unions. In a closely watched case brought by ten California teachers, the conservative court seems ready to say that forcing public workers to support unions violates the First Amendment. A ruling for the teachers would end a political and legal campaign waged by conservative foundations aimed at weakening public-sector unions. It will lead to teachers not supporting the union benefiting from the efforts of the union on behalf of all teachers. California and 20 other states have laws that allow unions to charge fees to non-union members (called a “fair share service fee” or “agency fee”) equivalent to union dues which pay for collective bargaining activities (including lobbying activities). The larger threat to the unions is that a decision against the union fees would encourage many workers who are happy with the work of their unions to simply avoid paying for the benefits.
If you’re trading options, it is suggested trading Put or Call credit spreads for the remainder of the week at 3.0 standard deviations or greater. Expect the price of the SPX to fall within 1799 and 1907 (2 standard deviations) by this Friday.
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