For the mid-week ending October 29, 2014, the S&P 500 Wednesday ended slightly down capping an advance of 120 points (6.43 percent) over 10 trading days. The reaction to the FOMC statement was negative with the S&P dropping to 1969 before ending at 1982 at the close. GDP showed a higher than expected growth rate, while initial jobless claims increased at a higher than expected number. Other news: Ebola nurse defies quarantine directive in Maine; and free Syrian army fighters battle ISIS in Kobani.
The Fed ended its bond-buying program and maintained that short-term interest rates will remain near zero for a “considerable time”. Economists considered the FOMC statement slightly more hawkish, in which the Fed believes it will be reaching its goal of full employment soon. Especially noted was that the dissenting vote came from dovish Narayana Kocherlakota, and not from hawks as occurred previously. This news sent stocks lower on concerns that a rate hike might occur sooner and be more aggressive.
GDP rose higher than expected for the third-quarter (3.5 percent actual vs. 3.1 percent expected), following a robust 4.6 percent in the second-quarter. The report showed GDP, adjusted for inflation, rose 2.3 percent from a year ago. The question facing the markets now is: how will the economy fare amid a slowdown in economies worldwide? The report showed that the economy was helped largely by trade, which added 1.32 percentage points to GDP.
In Maine, Ebola nurse Kaci Hickox has vowed to defy orders from health officials to remain quarantined for 21 days in her home until she is considered free of the disease. Kaci Hickox performed aid work in west Africa (Sierra Leone). State officials are seeking a court order to force the nurse into isolation for the remainder of her quarantine (till November 10). Currently, only four people in the U.S. have been diagnosed with Ebola.
Free Syrian army fighters have entered the city of Kobani to help fight ISIS. The Kurdish city is on the border between Syria and Turkey and is currently under siege by ISIS. The effectiveness of the small force (about 50 men) will depend on their weapons and continued support of U.S. airstrikes. The fighting in Kobani has been ongoing since mid-September despite dozens of airstrikes by coalition forces.
With such a large advance over the last two weeks, pundits are expecting a pull back for the remainder of the week. The FOMC statement release yesterday is providing support for sellers, which could move the S&P 500 back to its low of 1969.
For option traders, we are now suggesting Put credit spreads at 1.5+ standard deviations. The expected price of the SPX at the close on Friday will fall within 1958 -2000 (or 2 standard deviations).
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