Tuesday, December 8, 2015

Too Quick To Jump Off A Cliff

It appears most investors took more away from the OPEC meeting than expected. Once again I must take the time to explain that on Friday of last week, the member countries of the oil cartel met to discuss the possibility of price supports, but to the chagrin of the hurting resource economies, Saudi Arabia declined to even bring the topic to debate. Instead, they adjusted the official ceiling of production to meet their current known levels of daily supply additions. There was nothing new in these announcements. None of the countries declared augmentation of operations. Saudi Arabia did not even threaten to flood the earth with more of its cheap oil. The simple fact of acknowledging their current production levels sent the market into a tailspin, and when I say tailspin, I mean falling out of the sky in a blaze of glory. Major market averages are building on the losses of Monday with the Dow Jones Industrial Average down about -1.45% and the S&P 500 losing -1.18% over the past two days. The highs for these indices over the past two days are Mondy's opening price as bears totally outweigh the bulls and maybe even converting them. The largest contributors to Dow Jones losses were Chevron and Exxon-Mobil which both lost about -2.65%. A sample of oil equities shows the damage that has been done, the NYSE Arca index XOI has fallen -3.33% up to midday Tuesday. XNG, the sample of natural gas companies, fared almost as bad losing -2.92% in the same time period. -38.79%. This index is also being sold as a warmer winter is projected to diminish demand for heat. Year-to-date return on these equities has dropped to -19.8% with hopes of posting better results in 2016 sliding farther and farther as sentiment gets worse and worse. Looking at volume feed for SPDR Oil and Gas Exploration and Production (XOP) one can observe the reversal that occurred Monday, and was validated Tuesday. A -4.19% loss in the industry was accelerated by  a volume of 20.5 million. By midday on Tuesday, a tiny rebound is supported by 12 million in volume, a bearish drag of about 8 million. Comparing this major loss to losses of similar parity allows us to make judgements on how powerful this move was.

Data from WSJ
The above numbers chronicle some of the largest falls of the year for XOP, the ETF previously mentioned. Bolded are today's statistics compared with major losses that are similar as well as the crowd behind the rebound. No move this year has shown a difference in opinion quite like this one. First of all, the numbers supporting the loss were exceptionally higher, almost a third higher than the next most popular sell-off in November. While the events spurring these changes may have been different across each movement, investors have clearly denoted the power that OPEC still has in causing market swings. This reaction will only give them more hope and desire to try and affect the market more. Looking at the strength of rebounds, one can observe and conclude that today's attempt at making back lost ground was thinner than previous rallies hinting at the lasting effect of updated supply quota from the cartel. While showing that a huge difference occurred between losses and gains does not prove a permanent  downward price shift, it is certainly noteworthy when comparing against earlier performance. In my personal opinion, bears were too quick to sell here and may have gotten too emotional with they enormous losses realized in the WTI and Brent benchmarks as well as equities related to their movement. Even is supply problems have increased, energy companies are showing that improvement will allow them to succeed. This point has constantly been undermined by the capricious thoughts of a variable amount of barrels being brought onto the market sometime in the future. These austerity measures from firms are more clearly visible than theorizing about production from a Middle Eastern country, but uncertainty could definitely be part of the problem. Although I think that the "implied support" of $40 will hold up, short-term investors should definitely be aware of short selling opportunities that come from extreme reactions on the bear side. This seems like a more effective way of taking advantage of buzzsaws instead of buying low and holding on for dear life through the storm that is the oil and gas markets.

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