Options Market Update March 28, 2016

 
The S&P 500’s streak of five consecutive weekly advances was halted and the market lost marginal ground during the holiday-shortened week. The S&P 500 lost 0.67%, the Dow fell by 0.48% and the Nasdaq lost 0.45%.

For the bulls, the market looked strong early in the week. The market was indicated lower Tuesday following the terror attacks in Belgium, but was able to quickly recoup those losses. Also, fourth quarter GDP came in at 1.4% on Friday—higher than previously reported, merger and acquisition activity has picked up, and jobless claims and consumer data came in above expectations.

Many bears were disheartened when the market bounced back following the Belgium terror attacks, but the market weakened in the days that followed when five Federal Reserve members spoke out about raising interest rates sooner than the market expected. Also, oil and the financials stocks lost ground late in the week, and existing home sales and durable goods orders missed expectations.

Volatility


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 14.74, marginally higher on the week. Twice in the past week, the VIX started to show signs of bouncing off its recent lows as traders were again reminded of the potential for terror attacks and as currency market volatility picked up. However, by the end of the week, the VIX was again below 15, as the dips in the market were extremely shallow, and thus, traders don’t believe they need insurance.

Events for the Week to Come


This week will be packed with important economic data including Consumer Confidence, Consumer Sentiment, Consumer Spending and two manufacturing reports. However, the March Jobs Report on Friday and Janet Yellen’s speech on Tuesday will most likely get the major headlines.

Following the Federal Reserve’s announcement on interest rates two weeks ago and the press conference that followed, the market had deemed the Fed as “dovish,” and priced in just two rate hikes this year. But since then, five Federal Reserve members hinted that rate hikes should be much quicker, so traders will be extremely focused on the jobs report and Yellen’s speech for greater clarity.

What Traders are Saying


As we know, the market hates uncertainty. For example, if the Federal Reserve came out and announced four interest rate hikes this year, even if traders thought that was too extreme, they’d eventually get past it. However, traders become concerned when one week the Fed seems dovish and hints at just two rate hikes this year, and the next week voting members speak out in direct contradiction.

That’s why this week is so potentially important. It will be interesting to see if Fed chair Janet Yellen addresses this “open revolt” as some in the media are calling the recent public disagreements between Fed members. Similarly, it bears watching how the market reacts to positive and negative data this week. For example, is good economic data now bad for the market? Will a good jobs report sink the market because rate hikes will come sooner than expected?


This is an excerpt from Cabot Options Trader, which features the most profitable investment strategies in any market. It’s your guide to quick profits using puts, calls, spreads, straddles, iron condors and other options trades. Analyst Jacob Mintz explains and recommends diverse investing strategies for big gains with controlled risk.

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