You don’t have to spend hours studying the markets to understand the current shift in confidence over the last week. Oil prices dropping five percent this week shows a lack of confidence in all the stimulus being provided both in the US and around the world. Yes, the comments from the White House and Saudi Arabia along with the supply data rattled investors, but the mission of stimulus is growth and growth in turn creates demand. Last week investors were excited about the stimulus being offered and pushed the markets to new highs. The data now reflects the current reality of the global economy. That in turn is off setting the hope or confidence in future growth. I stated in my notes over the weekend that data would be the deciding factor for investors. We are getting more data, and it isn’t helping their confidence. The end result has been some selling, not a lot, but enough to raise questions, and rattle confidence short term. If your focus is short term, these reports are a warning sign that should have you adjusting your stops and locking in some profits. For longer term investors it will take more downside moves for you to exit positions.
Oil retreated below the $92 level on Wednesday and has been the catalyst for the current concerns. The supply data showed an increase of 8.5 million barrels versus the 2.5 million expected. The move broke support at $94 for crude and puts the $90 level as the next support. Is it time to be short oil? The trade signals technically have lined up along with a negative shift in sentiment, but you have to be disciplined in your approach to the trade. Oil is currently at $91.35 and the downside could accelerate, but I would not chase the trade. My concern currently is on the catalyst effect to the broad markets relative to the downside. Is this a real concern for the whole market or a concern relative to oil prices?
What happens and where is the greatest risk short term? Commodities have seen the greatest speculation relative to the stimulus and they pose the greatest risk from my view. Gold and silver have both moved higher on anticipation of inflation from the stimulus. The charts of both show an almost vertical move higher and some pullback would be in order if the current thinking prevails. The downside risk would also extend to the gold and silver mining stocks which have moved higher as well. The energy stocks have held up with the shift in oil prices for now, but they are likely to pullback as well. I would recommend tightening stops on the entire energy sector or influence. Remember, you can always buy the positions back on a reversal… protect your principle.
The transportation stocks have been part of the rationale for concern looking forward. Fedex, UPS and Norfolk Southern have reported earnings, and the data isn’t good. The drop in demand globally for shipping reflects the current state of the economy. The stimulus is too new to have worked through the system, and the data previous to the Fed action is being reported, which is solidifying what many have believed, the economy is slowing further. GDP data over the last two quarters has shown slowing, but we are seeing more, and the 2.5% estimates for third quarter may be revised lower. This is all part of the wall of worry facing investors near term.
The ripple effect to basic materials and industrial stocks would be the next concern. From there it will depend on how elaborate the expectations become. I am looking at the VIX index and it show no concerns currently at the 14 level. This could change quickly and is one indicator to watch short term. Put/Call ratio will be another indicator to watch. I am not saying this is a three alarm fire, but if there is smoke we should investigate to see what causing it, and deal with it now versus later.
The key is to watch money flow. When the selling start money will migrate to where it is treated the best and in turn, that will tell you the sentiment of the investor. TLT has moved higher the last three trading days. If that continues the flight to quality trade will be back, and the risk trades will be taken off. I am not attempting to speculate in my comments, but to raise the level of concern and adjust our stops to protect against the downside risk that is building.
All table have been updated on Models.