Sunday, December 13, 2015

Following The Leader

This upcoming week, the FOMC finally meets for the much-anticipated meeting where interest rates are expected to hop upwards. Their opening act was a terrifying slide in both equities and commodities, something that will speak loudly to dovish central bankers deliberating on the 16th. Weekly losses for some of the largest indices are those voices: the Dow Jones Industrial Average fell -3.26% and the S&P 500 dropped -3.79% over the past five trading sessions. With more bearish sentiment being activated, stocks are threatening to decline back to August correction levels. A truly harrowing prospect indeed. The Global Dow saw similar losses as well at -3.51% implying that weakness was not restricted to the U.S. Some of the most vulnerable parts of the economy revealed fragility that hadn't left. EEM, the GSCI index following major emerging market stocks lost -5.99% over the past week, almost twice the Dow Jones losses. The Russell 2000, monitoring volatile small-cap stocks, slide 5.05%. The accentuated movements of these sectors can be traced to their reactions to economic weakness that may still be a factor to consider. As a general rule of thumb, these stocks and indices may lead a broad trend because of their high beta. If their volatile patterns turn to a consistent downtrend, it may signal a move in more consistent markets. What, though, may be agitating these sectors? It is no secret really and hasn't been one this whole year. Commodity prices have been ravaged this year with losses of over 28% reported for CRB, a basket of core commodity' contracts. This week, their performance was even worse dropping -4.57% of its value. The shining star of the week, of course, was crude oil measured by both the Brent and WTI indices. On the week, the U.S. benchmark plunged a stunning -11.53%, and the international benchmark dropped -12.02%. Both reached yearly lows and approached prices that resemble the pain and sorrow of the financial crisis. Prices responded to the OPEC meeting last week, and pent up bearish emotions seemed to extend the losses. Losses from Exxon and Chevron, both contributors to the Dow Jones Industrial 30, painted major market averages red, and the color stuck. Broad-based declines appeared to be acknowledgements of the deflationary effects the supply glut will continue to have. Technically, this could be a point where oil and gas equities determine the movement of the overall market. We saw trends like this earlier in the year when crude oil really weighed on the market, and the trend could be back through the end of the year.

Some analysts are calling this the end of the 7-year bull market and could further be antagonized by a change in interest rate policy. These same analysts, though, were calling for the same thing just a couple months ago in August. It may be easy to assume that what comes way up must come way down, but that thinking can be dangerous. Gains in the past are sunk and have no major impact on the future, like a roulette game. Selling just because a "bull market" has been evident for too long is not a justified action. Instead, look above at what is really going on with the relationship to energy stocks. It has been a very common trend this year and should not be disregarded. Just as these equities are very sensitive to news, so the markets will be as well. Don't look for this trend to continue into 2016, though, because constant bad news from the oil and gas industry may soon be factored into pricing. When investors feel stock prices have been adjusted for these losses, trading will rely less on emotion in these areas. Nevertheless, a connection can be established between drastic movements in the energy sector and similar trends in the S&P 500. There is no doubt that investors have been playing Simon Says with oil and gas stocks because  the disparity in fundamentals may have been most evident there. Come FOMC meeting time, Yellen and her associates may decide that the trend
I have discussed has more relative economic implications than previously realized.

In the commodities market, crude oil is making dramatic moves that have pressed on the broad equities market. Analysis of the technical situation for WTI appears very bearish. The first thing to notice is a trendline spanning the previous three peaks on the chart. A bearish price channel can be drawn here as a continuation trend, but it seems more appropriate to show the most recent movement as a deviation from the trendline. Earliest this week, a low established in late August was broken with similar volume statistics shown by the Chaikin Money Flow indicator. The drops seem even stronger when noticing that bearish peaks have larger girth than their bullish counterpart. With the absence of smaller rebounds, the demand for the futures contract has fallen off a cliff with little hope of finding footing. Momentum and MACD crossover indicators show an equal amount of negativity surrounding the current trend. The RSI's signal that the security is oversold is less convincing than the last time that signal appeared, and the MACD line has already staged two bearish crossovers in the past couple of weeks. Prices through the end of the year will either oscillate at or below $40, continue to fall with more bad news, or increase at the sound of supply dwindling. Unfortunately for equities, the potential for major sentiment reversals is slim, and more losses may be on the horizon.


  1. One thing well said was "more losses are likely on the horizon"!

  2. Need higher gas prices to help my morning commute, too many cars on the road, need folks to start car-pooling and/or tele-commuting again!

    1. I can think of plenty of consumers that would disagree with that statement haha