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Weekly market recap: Markets make new highs on improving economic data

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For the week ending August 23, 2014, the markets made new all-time highs on a decline in geopolitical concerns and improving economic data. The FOMC Minutes and Chair Yellen speech in Jackson Hole confirmed no major policy shifts. Below is a recap of the markets for each day of the week.

The markets rose sharply on Monday as the Housing Market Index rose more than expected, posting a seven month high. The regional breakdown: Midwest the strongest, followed by the West, Northeast, and South. The National Association of Homebuilders has noted a "noticeable" rise in serious buyers.

On Tuesday the markets continued to rally on far better than expected Housing Starts, a reflection of an improving labor market and expectations of a rise in mortgage rates. Housing starts jumped 16 percent last month, while home construction rose 22 percent this year. This large jump raised concerns over its sustainability, especially if mortgage rates do rise.

On Wednesday, the markets rose on expectations of rising economic strength. Concerns of a Fed policy shift, raising short-term rates sooner than expected, were offset by comments made in the FOMC Minutes that sluggish wage rates are creating a slack in the labor market. However, it is clear the debate is starting to lean towards a change in thinking before long. Overall, the minutes did indicate a need to be more predictable, with the probability that rates will be raised sooner, but very slowly.

The markets continued to rise on Thursday led by a jump in existing home sales and a decline in jobless claims. The Philly Fed survey, at a three-year high, showed a big jump in the manufacturing sector; however, new orders have slowed sharply and shipments are down.

On Friday the markets were mixed with the Dow and S&P down, and the Nasdaq and Russell higher. Chair Janet Yellen spoke at the Jackson Hole conference of central bankers. There were no Fed policy shifts discussed; nor any clarity on when the Fed will be raising interest rates. RBS U.S. Chief Economist, Michelle Girard noted that " The take-away from this speech is that the Fed has no measure upon which it feels it can confidently base its policy decisions. Thus, ‘monetary policy must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.’ In other words, the Fed will continue to monitor incoming information on the labor market and inflation to determine the appropriate stance of monetary policy — which leaves us where we were before.”

Also on Friday, the convoy of Russian 'aid' trucks entered Ukraine without approval, which sharply raised tensions and drawing harsh criticism. After a quick unloading of supplies (indicating that most of the trucks carried less than a full load), the convoy returned to Donetsk, Russia.

The bottom line: the U.S. economy continues to improve with an impressive jump in the housing market. Geopolitical issues, while currently subdued, could at anytime rise up and grab headlines. The Fed remains prepared to keep interest rates low if the economy starts to show weakness.

The focus next week in the U.S., with a full economic schedule, will be on the following: New Home Sales; Durable Goods Orders; GDP; Jobless Claims; and Personal Income and Outlays .

Globally the focus will be on the following: Germany Retail Sales, and Unemployment; Eurozone Harmonized Index of Consumer Prices, and Unemployment.

Year-to-date the markets are up: Dow 2.6%; S&P500 7.6%; Nasdaq 8.7%.

The Markets for the past week were: DJIA up 2.0%; S&P500 up 1.7%; Nasdaq COMP up 1.6%.

Commodities (ETFs) for the past week were: Gold (GLD) down -1.82%; Silver (SLV) down -0.90%; Oil (OIH) up 0.75%; Dollar (UUP) up 1.11%; 30-yr Bonds (TYX) rose 2 basis points to 3.16%.

The VIX this past week (a measure of market sentiment and volatility) dropped to 11.47% as the economy continues to improve and geopolitical issues subside. The markets are vulnerable to news risk, with implied volatility so low.

To see what's on the calendar for next week, go to the Econoday calendar.

The economic calendar for next week is full: on Monday – New Home Sales, Dallas Fed Mfg Survey; on Tuesday – Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence; on Wednesday – Weekly EIA Petroleum Status Report; on Thursday – Weekly Jobless Claims, GDP, Pending Home Sales Index; and Friday – Personal Income and Outlays, Chicago PMI, Consumer Sentiment.

If you're trading options, we suggest Put Credit spreads for next week at 1.75 standard deviations or greater. Expect the price of the SPX to fall within 1926 and 2052 (2 standard deviations).

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

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