The Dow Retains a Modicum of Respectability

Barely a month ago the Dow Jones Industrial Average was a solid performer. The bourse was trading above the 17,500 level, and while year-to-date returns were modest, they were positive. Now we are looking at a situation where the Dow has plunged from its 52-week high of 18,351.36 to its present trading level at 16,379.94. Binary options traders who went short on the DJIA following Black Monday were handsomely rewarded. That’s the beauty of binary options trading; the size of the movement is irrelevant – it’s the direction that matters. Now that we have seen a degree of calm return to the markets it becomes a little bit more complicated to forecast future movements with any degree of accuracy.

What the Economic Crystal Ball is Saying

However my crystal ball is telling me that the September 16-17 meeting of the FOMC is one of the most crucial dates on the short-term economic calendar. Should the Fed chairperson Janet Yellen announce a rate hike, you can rest assured that the DJIA will move lower. This is typically what happens in the event of a rate hike which causes a contraction to the long-term profitability of companies, thereby reducing profits and shareholder dividends. A Fed rate hike also has the effect of boosting dollar demand, which in the short term would warrant the placement of call options on the USD, but in the long-term may indeed hinder the country’s overall economic growth. A stronger US dollar has the effect of making US exports relatively more expensive, and it results in capital flight from emerging market economies, disinvestment in poorly performing economies. More importantly, a strong US dollar is a disincentive to countries that by dollar-denominated commodities.

The trick is being able to gauge precisely how the Fed decision is going to go. Fortunately one doesn’t have to wait until the last moment to place a call or a put option on the DJIA. Various economic announcements will lead up to the meeting on Wednesday and Thursday next week. These include the following: