Over the weekend, the markets were watching the situation in Iraq very closely for two reasons: First, the concern over the escalation of U.S. involvement (i.e., troops on the ground); and second the concern with oil prices. As the situation in Iraq unfolds, the question is: Will the S&P rally or retreat this week?
The Obama Administration has indicated that it will only help the Nouri al-Maliki government if Shiite Iraqi leaders made a concerted effort to overcome sectarian divisions which currently exclude Sunni representation. President Obama made it clear that U.S. ground troops is not an option. The markets reacted favorably to that news on Friday.
But the pressure in Congress is mounting for some action to be taken to avoid an overthrow of the Iraqi government. Iran has offered to send 2 thousand troops to aid Iraq in driving back the ISIS militants. However, the Pentagon and the White House have denied any active consideration of military coordination with Iran. Instead, the Iraqi air force struck ISIS positions in Saqlawiya (northwest of Falluja) which reportedly killed over 200 militants.
The longer-term concern for the markets is Iraqi oil production. The widely expected doubling (or tripling) of oil supplies from Iraq over the next few years is now called into question along with the $100 per barrel price of crude. With the fighting confined to the North, and Iraq's key oil production infrastructure (about 90 percent) located in the South, analysts believe that the current level of 2 million barrels a day can be sustained.
Today the markets were choppy in response to the news above, ending slightly higher. The VIX rose 3.86 percent to 12.65 reflecting the uncertainty with Iraq and oil production. We continue to expect the markets to be choppy the remainder of this week, especially with the FOMC news slated for Wednesday afternoon and quadruple witching on Friday. Expect small dips to be followed by buying; if the markets overextend to the upside, expect profit taking. Pundits are still expecting the S&P to hit 2,000 by the end of this month.
For more information about options, see the 'Suggested by the author' links below.