Monday, May 25th, 2020

Is the Market Correction Here?


Options traders may wish to ask themselves if the market correction is here. The Wall Street Journal reports a sharp drop in U.S. stocks.

U.S. stocks tumbled on Tuesday as the dollar rose to a nearly 12-year high against the euro and bond yields in Europe hit record lows.

The Dow Jones Industrial Average dropped 219 points, or 1.2%, to 17776. The S&P 500 index fell 22 points, or 1.1%, to 2057, and the Nasdaq Composite lost 64 points, or 1.3%, to 4879.

Nine out of the S&P 500’s 10 sectors were in the red, with utilities stocks the only sector posting gains.

With Tuesday’s drop, U.S. stocks are in the red for 2015, a sharp reversal from about a week ago when both the Dow industrials and the S&P 500 closed at record highs and the Nasdaq Composite ended the session above 5000 for the first time in nearly 15 years.

Specific reasons for the drop in stocks include a strong dollar that makes US products more expensive in offshore markets, weakening economies in Europe and Asia, and the prospect of higher interest rates. With several things to worry about options traders may wish to ask themselves, is the market correction here? If so it is time to buy puts in a hurry.

The Strong Dollar

Success often begets a corresponding set of problems. For example, the US economy is strengthening and that is making the US dollar stronger. The trouble is that the economy is getting stronger because US companies are selling more products overseas. Now it appears that US products might become too expensive to compete in markets such as the European Union. Forbes reports that the Euro nears parity with the dollar. That is a twelve year low for the Euro zone currency versus the greenback.

The euro is nearing parity with the U.S. dollar as the common currency sank to a 12-year low of €1.0735 versus the greenback on Tuesday. The euro’s fall is fueled by falling European bond yields, concerns about Greece, and the overall grim outlook for the global economy.

There is no fuss, no sense of urgency, just a matter-of-fact move lower for the single unit that is now backed by a quantitative easing (QE) program. The onset of large-scale European Central Bank (ECB) QE is also weighing heavily on the EUR. This is allowing the mighty USD to continue to rack up multiyear highs across a number of currency fronts; supported by stronger U.S. fundamental data (strong U.S. jobs and full employment) and some hawkish Federal Reserve talk.

A strong dollar makes it cheaper to buy foreign products and invest offshore. It makes US products more expensive and hurts US manufacturers. The US stock market has had a good six year run. Now we ask, is the market correction here?

The Fed and Interest Rates

The Federal Reserve has keep interest rates near zero for years in order to allow the US economy to recover. The Fed has said repeatedly that when the economy is strong enough they will raise interest rates. Bloomberg attributes the slide in US stocks to interest rate concerns.

U.S. stocks fell, wiping out gains for the year, as the dollar strengthened to near a 12-year high versus the euro amid speculation the Federal Reserve is moving closer to raising interest rates.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. lost at least 1.5 percent as financial companies in the Standard & Poor’s 500 Index led declines. United Technologies Corp., Cisco Systems Inc. and Walt Disney Co. dropped more than 1.5 percent to pace losses among the biggest companies.

The bottom line question for options traders is how fall stocks will fall and if the market correction is here will the fall be substantial.

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