For the mid-week ending February 18, 2014, the Dow and S&P 500 are stuck in a very narrow holding pattern despite dovish FOMC minutes. Other news items: a supply glut weighs on oil prices; Germany rejects Greece’s loan extension request; and Ukrainian casualties grow from Debaltseve retreat after the ceasefire.
The Dow and S&P 500 this week have remained in a very narrow range despite a more dovish FOMC minutes. The January minutes, released Wednesday, revealed that most of the committee members support keeping short-term interest rates at low levels for a longer time than mid-year. There was also concern expressed about the credibility of the 2 percent inflation goal, and the need to explore additional accommodative tools. The Dow has remained in a very tight 127 point range; the S&P 500’s range is just over 12 points.
Crude oil inventories have jumped far more than expected (7.7 million barrels), and are at their highest level in 80 years. This data has stopped an early rally that was driven by the decline in U.S. rig count (now at its lowest level since 2011). The number of rigs drilling for oil have dropped for 10 straight weeks, spurring hopes that this would reduce the supply glut. The decline in crude oil prices has led to a rise in volatility (with the largest spike of 200 percent for the year).
Greece’s request for a loan extension has been turned down by Germany. Greece requested on Thursday a 6-month extension of its loan with the European Commission and the ECB. But the German Finance Ministry rejected the request stating that it was not substantial enough to resolve matters. Another meeting has been scheduled for Friday in Brussels to resolve the deadlock. Many of the conditions outlined by the Finance Ministry include cuts in government spending and higher taxes; austerity measures that led to the replacement of the previous government. If an agreement is not reached, Greece’s current bailout program will expire at the end of this month. Friday’s meeting will be the third in two weeks.
Since the ceasefire on Sunday, Ukraine has continued to suffer casualties in the Debaltseve, a strategically important area in eastern Ukraine that is now controlled by pro-Russian rebels. President Petro Poroshenko has requested the deployment of United Nations peacekeeping forces in the area. To date, none of the conditions of the peace accord have been carried out. Fighting continues throughout the eastern regions of Donetsk and Luhansk, and there has been no withdrawal of heavy weaponry and artillery.
For option traders, it is now suggested using Put credit spreads at 1.75+ standard deviations. The expected price of the SPX at the close on Friday will fall within 2130 – 2064 (or 2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.