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Mid-week market recap: Markets rally back despite Ukraine uncertainty

Markets rally back despite Ukraine uncertainty
Markets rally back despite Ukraine uncertainty

For the mid-week ending August 13, 2014, the markets have been overcoming the loss from the prior two weeks as the situation in Ukraine remains uncertain. In Iraq, the U.S. involvement increases with arms sent to the Kurds to fight ISIS. The crisis in Gaza remains as the last cease-fire ended with an exchange of rockets and missiles.

A large Russian convoy, on a "humanitarian mission", is nearing the Ukraine border controlled by pro-Russian rebels. This contradicts a tentative agreement to have the convoy cross the border at a location controlled by Ukraine, where an inspection could be performed by the Red Cross and Ukraine officials.

While Russia claims an agreement and support have been obtained from the Red Cross, this has been denied by the Red Cross which fuels suspicion that the convoy is really an invasion attempt.

The U.S. has gone beyond air-strikes in Iraq by providing arms directly to the Kurds to fight ISIS. Light arms and ammunition have been provided by the CIA; not through the Defense Department. This bypasses the Iraq government in Baghdad, which currently is trying to remove Prime Minister Nouri al-Maliki by appointing a replacement.

This raises concerns that American troops may be sent back into Iraq. The current rhetoric calls for support of refugee rescue missions; not combat. President Obama has reiterated that sending troops into combat has been "ruled out".

In Gaza, another cease-fire has ended with an exchange of missiles and rockets. This occurred as Palestinian leaders and Israel had just agreed on extending the cease-fire another five days in the hope of agreeing to a more durable truce. The exchange of fire leaves in doubt the viability of the five-day truce.

Economic news this week is mixed, with the jobs market improving but retail sales declining. The drop in retail sales reduces concern that the Fed will increase short-term interest rates before mid-2015. In response, the Dow is once again in positive territory for this year.

While the concern over Ukraine has eased, the potential for it to explode is still there. If the Russian convoy is really a 'Trojan Horse', turning a humanitarian event into an invasion, the impact will cause the markets to drop violently.

For option traders, place Put credit spreads at 2 standard deviations. The expected price of the SPX at the close on Friday will fall within 1985-1910 (or 2 standard deviations).

For more information about options, see the 'Suggested by the author' links below.

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