For the week ending July 19, 2014, the markets (except for the Russell 2000) ended up despite being shook by the tragic Malaysian plane crash over the Ukraine; the Russell 2000 (a small caps index) saw its second down week. Geopolitical events in Ukraine and Israel (Gaza Strip) are raising concerns that could easily overshadow earnings releases.
Tragedy struck mid Thursday when Malaysian airlines flight MH17 was brought down by a Russian made surface-to-air missile. The S&P500 dropped -1.15 percent on the news as concerns rose over the growing conflict in Ukraine and increased U.S. involvement. U.S. Ambassador Samantha Power said, at an emergency meeting of the U.N. Security Council, the pro-Russian militants could not operate such a sophisticated missile system without help - presumably from Russia.
The markets the next day shrugged off the tragic event, with the S&P500 advancing 1.03 percent. Thursday's plunge, brought on by several news driven automated programs and event traders, was met by buyers on Friday. The news media (with hindsight) considers this a knee-jerk reaction, with little concern that this will develop into something larger. However, It is likely that zero interest rates makes it easy for institutional traders to buy the dips; there is less fear.
The sharp swings this week is a wake-up call for the markets, which have largely ignored rising geopolitical tensions. Over the next few weeks we will see if tensions between the U.S. and Russia escalate over Ukraine, and if the situation in Israel and the Palestinians causes tensions in the Middle-East to rise (it is currently sending oil prices higher).
Fed Chair Janet Yellen met before the Senate and the House this week 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 this week, falling only -0.72 percent after a strong rally on Friday.
The bottom line: despite the disturbing geopolitical events, the equity markets advanced on good earnings reports.
The focus next week in the U.S., besides earnings, will be on the consumer and housing. Key reports for the consumer will be the Consumer Price Index and Durable Goods Orders; for housing, Existing Home Sales, New Home Sales, and the FHFA House Price Index.
Globally, the focus will be on July flash PMIs (due on Thursday). Germany will be releasing its Producer Price Index on Monday.
With growing geopolitical concerns and a large number of earnings reports, we expect the markets next week will continue to be choppy with volatility increasing. Expect a dip early in the week, followed by strong buying that could lead the S&P500 to 1990.
Year-to-date the markets are up: Dow 3.2%; S&P500 7.0%; Nasdaq 6.1%.
The Markets for the past week were: DJIA up 0.9%; S&P500 up 0.5%; Nasdaq COMP up 0.4%.
Commodities (ETFs) for the past week were: Gold (GLD) down -2.06%; Silver (SLV) down -2.67%; Oil (OIH) up 0.80%; Dollar (UUP) up 0.47%; 30-yr Bonds (TYX) dropped 5 basis points to 3.29%.
The VIX this past week (a measure of market sentiment and volatility) dropped slightly to 12.06% due to the large rally on Friday overcoming the huge rise on Thursday.
To see what's on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is moderate: on Monday – nothing; on Tuesday – Consumer Price Index, Existing Home Sales, FHFA House Price Index; on Wednesday –Weekly EIA Petroleum Status Report; on Thursday –Weekly Jobless Claims, PMI Manufacturing Index Flash, New Home Sales; and Friday – Durable Goods Orders.
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 1913 and 2045 (2 standard deviations).
For more information about options, see the 'Suggested by the author' links below.