Thursday, September 10, 2015

Movement Comparisons: WTI, DJIA, and S&P Energy

Interest rate hikes are the talk of the town so far this September as the Federal Reserve Board prepares for their meetings on the 16th and the 17th. Many factors have pointed towards the certainty of raising the cost of borrowing money, but Fed leader Janet Yellen has been hesitant to pull the trigger. Even though the labor market has appeared to stabilize with unemployment levels reaching their typical 5%, worries over deflationary pressures threaten the expansion of the U.S. markets and, in turn, global economic health. Despite the fact that the Fed's actions are surrounded with ambiguity, a bull market attempted to post some gains today as the Dow Jones and the S&P 500 showed early gains that were pared down to about half a percentage point of additions. The movement seemed to reflect buyers reacting to the possibility of no rate hikes. As the main indices showed gains during today's trading session, crude oil futures increased as well but in a more convincing manner. Brent jumped $1.48 (+3.35%), and Brent topped $50 with $1.14 (+2.31%) added to its price. Traders reacted to supply data that showed a decline in daily production as a three-month trend has decreased barrels produced a day from 9.4 million to 9.1 million. As a result bulls bought into the domestic benchmark 438,292 times, beating the previous trading session's volume by 60,000. An Accumulation Distribution Line shows the resurgence of a possible bull wave supporting a price rebound. Furthermore, energy companies enjoyed the gains from the Dow and WTI as they showed small gains overall with XOI and XNG both inching up 0.5%.


I thought it might be interesting to look at some data regarding daily price movements between different tickers, specifically WTI, DJIA, and the S&P 500 Energy Index, On the left, I have listed daily price movements for the last eight sessions with gains in green and losses in red. The right side is a graph which maps purely direction, a 1 for a positive move that day and a -1 for a loss. The idea here is that investors place too much on a direction, green or red. The size of the move can affect intensity, but the direction has an effect on the mood of investing tailored to indices that measure market or industry health. Here, the DJIA measures overall market health. A Dow gain, with all else equal, will convince traders that buying is the trend that should be followed that day. Herd mentality plays a large role in this, and if wide enough, can cause speculative bubbles to form under prices. In the same way, a gain seen in the price of WTI sweet crude oil will cause energy prices to increase and create an impetus for buying. Sometimes all it takes is a 0.50% gain in crude oil prices for the energy sector to reap the benefits of crowd behavior. The chart above supports this. On days that the DJIA and WTI both moved in the same direction, energy stocks (related to energy prices and overall economic health) followed them. Two days (August 31 and Sept 8) presented a scenario where the Dow and WTI moved in different directions. For each of these situations, the energy index moved with the fluctuation that was relatively stronger, so when the DJIA increased more percentage points on Sept. 8, S&P Energy went with it as WTI lost a measly $0.09. What kind of lesson can we draw from these observations? The initial opening directional movement has a particular psychological advantage as an indicator of intraday performance due to its ability to clearly define a bull and a bear zone. The trend mentioned will not always be prevalent, but it's worth noting the dangers of herd mentality. Is it a way to beat the system? A signal that profits can be made from the spreading of bullish behavior? Perhaps, but most importantly, it reminds investors that the markets remain joined by financial intricacies that complicate the analysis of an investment. Right now, it seems that stock growth and crude oil growth are linked as Dow increases signal stronger demand which has been absent in the realm of energy stocks and needed to release downward pressure on prices. Conversely, the increase in crude oil futures contracts will benefit stocks in that inflation will be allowed to rise higher to a stable 2% desired by the Fed. Energy companies are securities that will benefit from the positive movement of both energy prices and the Dow index; therefore, they have the best chance for accelerated growth (and accelerated loss) in the next 3 months. These are general trends that can be used to inform one's investing plan in the short term as these technicalities can vary depending on the financial environment. I encourage further research of this trend and the identification of others using directional movement as intermarket analysis can be some of the most valuable to an avid trader.

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