Daily Market Update – December 17, 2014 (8:30 AM)
Yesterday, as far as volatility goes, would be a really hard day to match.
While the big story of the day was the collapse of the Russian Ruble, it was still the price of oil that dictated in which direction the market went, and as oil waxed and eaned during the day, so did the market.
Going from the various peaks to troughs and back throughout the day, without regard to any minor moves back and forth, the DJIA moved about 700 points, finally finishing with a tripe digit loss after having been more than 200 points higher.
Lately the day before an FOMC Statement release day has been inexplicably a strong day for markets. For a while some were crediting that phenomenon for the market’s strength yesterday, but it became clear that oil was still in charge of everything. The recovery in oil earlier in the day, beginning before the opening bell helped to greatly reduce the losses in the futures trading as reactions were coming in to the 65% increase in the Bank of Russia’s key lending rate and the collapse of the Ruble.
This morning oil is again down sharply, yet the futures are pointing higher, maybe as there’s some optimism regarding the FOMC and then looking ahead another hour or so, when Janet Yellen begins her press conference.
Other than on the occassion of her very first press conference when she made some vague comments regarding timeframes for action, she has done nothing but lift markets during her question and answer sessions.
Today, the issue at ahnd is whether the FOMC will drop its “considerable time” language, which would indicate that interest rate hikes were going to be coming sooner, rather than later.
Since the FOMC is admittedly “data drive,” it’s hard to see how they would ignore last week’s decreases in PPI and the dropping rate on 10 Year Treasuries. While decreased energy costs and an increasing employment rate should send prices and wagers higher, that’s still a theoretical outcome, whereas the actual data isn’t looking as if it shows inflation in the immediate future.
Yesterday did look promising for a while as the rebounds were all across the board, but that sea of green faded very decisively, although the energy sector did maintain its gains, just at levels far lower than they had been earlier in the day.
It was tempting to consider selling some DOH calls on some positions, but in the back of your mind you have to be concerned about a sudden pop higher in prices, especially through the energy sector and the chance of seeing positions assigned away when you would really prefer that not be the case.
As long as the option market continues to have very light volume the ability to rollover uch positions in order to prevent assignment is difficult and so the risk-reward proposition becomes more risky, even as the reward, in the form of option premiums, climbs along with the volatilty.
Still, even if there is another strong spike higher today and even if coming before and then again after the FOMC, there may not be too much justification in taking the kind of risk associated with DOH Trades.
Given that there has been considerable gaps down in the prices of many stocks it wouldn’t be inconceivable that there could also be gap ups once the fire is lit.
At the moment, as we get set to begin trading for this morning, the S&P 500 is about 5% off from its recent highs, which has been the average for these every other month declines. The last one, however, was almost a bona fide correction, approaching 10%, so it’s hard to have the same confidence that this is just another in a series of mini-corrections over nearly the past 3 years that will simply end up taking us to even more new highs.
As long as oil has further downside potential there has to be some concern that the market will continue to follow lower, despite the logic that such decreases should end up being a net positive. The one saving grace is that energy sector prices tend to recover more quickly than the underlying commodity and any economic news that indicates that falling energy prices are actually the tonic for the economy that we thought it would be should send stock prices broadly higher.