For the mid-week ending March 2, 2016, the Dow and S&P 500 are up as crude oil prices firm a bit and mutual funds are on a buying spree. After a big down day on Monday, the markets came roaring back on Tuesday and then rested on Wednesday. In other news: the Fed’s Beige Book paints a drab picture; oil prices stabilize; and, job growth could push Fed to raise rates again.
Stocks post their best start to a month in more than three years. The three major averages all closed over 2 percent on Tuesday, helped by a rise in oil prices and a better-than-expected ISM manufacturing report. The Dow closed up 2.1 percent (340 points), and the S&P 500 closed up 2.39 percent (46 points). U.S. crude oil futures closed up after an intraday dip to settle at $34.40. The February ISM manufacturing report came in about 1 point above expectations at 49.5, and above January’s number of 48.2; anything below 50 indicates contraction. In other economic news, construction spending rose 1.5 percent (its highest level since 2007); February’s auto sales rose around 7 percent hitting a record 17.4 million vehicles.
The Fed Beige Book, a key economic report, provided a relatively somber view of the U.S. economy, underscoring the notion that the Fed will be slow to raise interest rates further. None of the 12 districts reported any significant improvements during the period spanning January through February. Three districts reported “mixed” activity while two others reported flat growth. Tourism was the one bright spot in the report, in which many districts experienced dramatic gains. The report also showed that there was no inflation pressure, with consumer prices holding steady.
Oil prices are stabilizing amid no action to curtail production. One analyst says prices must fall below $25 per barrel before oil producers take action. Crude inventories rose 10.4 million barrels to a record 517.98 million barrels. Prices have risen since February thanks to slowing U.S. output which has fallen for a third month in December.
Strong job growth may push the Fed to raise interest rates again. With market turbulence subsiding, the jobs report this Friday may encourage the Fed to consider a June rate hike. But many question the durability of the economic recovery, and the return of market turbulence in the global economy if oil prices plunge again or China’s growth continues to diminish. While the U.S. is experiencing growth at 2 percent, the global economy is considered to be in a recession.
If you’re trading options, it is suggested trading Put credit spreads for the remainder of the week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 1917 and 2037 (2 standard deviations) by this Friday.
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