For the mid-week ending July 16, 2014, the Dow made a new record high while the Russell 2000 is down for the week. Earnings season has helped add to the rally that never seems to end, despite Fed Chair Janet Yellen's statement that certain tech stocks were "overvalued".
The Dow hit a new closing high today at 17,138, up 0.45%. The markets rose on the following corporate news: Fox put an $80 billion bid in to buy Time Warner (its shares rose 17% on the news) which was rejected; Apple and IBM announced they will team up to develop mobile applications (stocks of both companies rose on the news); and Intel reported earnings that beat expectations (its shares rose 8 percent).
Fed Chair Janet Yellen met before the Senate (yesterday) and the House (today) and stated "Valuation metrics in some sectors do appear substantially stretched — particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year." This sent the Russell 2000 (a small cap index) down the last 2 days, falling -1.41 percent for the week.
Earnings Season kicked off in earnest this week. Most notables are: Intel (beat estimates); Goldman Sachs (beat estimates); JP Morgan (beat estimates); Citigroup (beat estimates); Alcoa (beat estimates; reported last week); Ebay (beat estimates; reported at the close). Tomorrow the following companies will report: Google; IBM; and Seagate.
This situation in Iraq is growing more desperate. The Shiite militias that have been dispatched to replace the collapsed Iraqi army are proving ineffective in offensive operations against the radical ISIS. Local residents are reporting that attempts by the militia to recapture the town of Awja have been unsuccessful.
The White House has increased sanctions against Russia by targeting large banks, and energy and defense firms in an attempt to curtail Moscow's intervention in Ukraine. This move was coordinated with our European allies that targeted loans for new projects in Russia.
With lots of economic news this week, and earnings reports, we expect the markets to continue to rise, and volatility to drop. If earnings continue to beat expectations, we can expect new highs to be reached.
For option traders, place Put credit spreads at 1.5 standard deviations. The expected price of the SPX at the close on Friday will fall within 1950-2013 (or 2 standard deviations).
For more information about options, see the 'Suggested by the author' links below.