Monday, October 26, 2015

Energy Lags on a Neutral Day

We're at it again. A bullish run from the end of last week appears to have been capped once more with muted movement. Poor performances from tech stocks as well as natural gas firms lead the decliners while advancing stocks made out almost as strong. After a weekend full of central banking activity, the U.S. markets begin to shift their focus to an FOMC meeting scheduled to convene soon even though rate hikes appear very rare. Trading today followed the ECB's hint at more quantitative easing, and, more recently, the People's Bank of China's decision to cut interest rates, reduce reserve requirements, and extirpate a cap on deposits. As worldwide stimulus hits the global economies, markets have responded. Trading sessions in Europe and Asia showed particularly evident jump during the end of last week on Oct 22 and 23. During those days, the Shanghai composite grew about 250 points (7.29%), and the STOXX Europe 600 grew about 20 points (5.33%). The local economic efforts reached farther than domestic markets as a the easing had a trickle down effect on globalized economies. In the same time, the Asian Dow grew 30 points (1.02%) improving on a monthly return of 12.14%, and the Global Dow grew 48 points (1.95%). Behind these numbers, the Dow Jones Industrial Average continues to support a bullish rally with a 10.19% gain on the month. The S&P 500 with a loss of -0.19% still supports the overall bullish tinge that accentuates the market with gains up to 10.07%. With a rather nondescript opening to the week, investors look forward to Fed deliberations as well as a thick earnings week that threatens more immediate adjustments with a poor third quarter. Apple, one of the most talked about companies in the United States (if not the world), saw a 3% decrease in their price as projections for their earnings report come in as dim. As large-cap companies continue to  implicate the global slowdown, the current bullish rally looks more and more like a facade of investor speculation. Everyone remembers a time when the Dow was this high, and it was thrown off a cliff. Almost three months ago, the correction wasted billions of dollars as the major indexes shed their girth. Now, money seems thinner, with more central banks applying easy monetary policy than the first half of the year, and rally keeps going. Something seems out of balance (though we are constantly reminded that the pendulum always swings back to equilibrium).

Just as a pendulum has conflicting forces acting upon it in movement, so does the overall stock market which is pushed and pulled by sector performance on any given day. Today, seven out of ten sectors fell behind, but not substantially. Gaining sectors played a large enough role where bulls and bears were mostly canceled out. The slightly negative orientation of the market can be attributed to losses in the energy sector (again, how ironic that this blog is about oil). WTI contracts fell to a two-month low at $43.98, a loss of -1.40%. This was caused by bearish supply data which saw increasing oil imports and no slow down in production. The PHLX Oil Service index fell -2.53% showing where the declines were most concentrated. Now being factored into the outlook for oil companies is the problem of default as cash flow continues to be a problem for small and large oil firms alike. Although, the credit issues will lie with small-cap and some mid-cap energy stocks that are no doubt already experiencing the risk premium being assigned to them. On the national level, countries that are major oil exporters will see higher risk premiums as well if supply and demand problems stay low on an international level. While the loss in the oil industry loomed largely, this next of energy kin on the futures exchange experienced even greater losses, natural gas. In a trading session that saw a multi-year low, natural gas contracts fell a total of -9.8% at one point, a loss of $0.22. While it may seem inconsequential, natural gas price plays a huge part in integrated energy services that have relied on their diversification to survive the price slump. All of the biggest oil majors have plays in natural gas, and the fossil fuel is increasingly becoming a major source of powering homes and more. Further deflationary pressure from this commodity could hurt industry associated with manufacturing and housing.

The technicals of the natural gas contract were a clear signal of a bearish reversal. The blue numbers up to five show natural gas price repeatedly dip below the 50-day moving average until finally breaking past it on the fifth bounce. I suspect a resistance could be established around there. At the same time, a bearish price channel seems to have developed as well and had implicated some sort of downtrend in the long run.The ceiling of the pattern was validated three times after bulls pushed up to that level then receded. A bearish reversal looks even more apparent as today's session began with a large gap after four previous losing sessions. While the gap could be one of exhaustion, volume stats argue against that position. The Chaikin Money Flow indicator shows huge amounts of money flowing out of the energy commodity. This came after bullish peaks that got lower and lower as rallies lost their moment over time. The MACD shows three bearish crossovers and two bullish crossovers in the past two months, a sign of significant movement to come. The large spread on the last move hints at a move with more substance. The only bearish indicator, the RSI measure of momentum, had shown a steady overselling of natural gas into this month, Short-term strength that is often shown by RSI may be overshadowed, though, as the energy situation continues to worsen with bearish commodity prices. I expect this to be a significant move with lower prices entering a trading period under the resistance created by the 50-day trend line.

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