This is more fun than I can stand. The good news is we are predominately in cash. The bad news is I got stopped out of most short positions on Wednesday! I love when the anxiety and stupidity start to drive the activity. Worries about the global markets drove the indexes lower on Wednesday by 1.6%, FOMC minutes sparked a rally of 1.8% and Thursdays worries about earnings and the global markets return to drop the market 2% on the day. So much for the influence or elasticity of the FOMC minutes on the markets. Maybe the Fed has lost their influence on markets and direction. I can hardly wait for Friday. Below is the intraday 5 minute chart of the S&P 500 to show the swings and anxiety traders have produced over the last week. The question still remains on direction and the trading range has developed it is just twice as wide as I thought when I stated in my notes last Sunday of 1945-1970. How about 1978-1926! Those are the type of swings that will make seasick.
I am not going to get into all the whys, whats, hows and what fors tonight as you can read all about those speculations on any financial web page or media outlet. They have as much chance of being right as Elaine Garzarelli… wrong since the crash of 1987. What I would rather do with my time and brain energy is look at what does make sense going forward and any opportunities worth trading or investing.
Crude Oil caught my eye today as it has tumbled more than 18% since the high in June. The price now stands at $85.75 per barrel. Are we heading towards a cheap oil cycle in the US? This has been a theory for the last three years as the expansion into horizontal drilling, fracking and other methods of extracting oil from the ground have been introduced and effective. Supply has been rising, but oil was not dropping… it seemed the one element missing in hindsight was a stronger dollar. If you look at a chart of the dollar (UUP) it correlates to the drop in crude prices fairly close. If the dollar has been the missing element and the expectations are for the buck to remain stronger going forward it would be prudent to believe oil prices could remain lower going forward.
While lower prices in crude are a positive for the price of gasoline you have to extrapolate that to the potential economic impact in the US. Trucking costs decline, jet fuel declines, etc. All of the pass through benefits to the consumer are a positive for the economic picture. Some believe the benefits will not pass through to the consumer, but the Airlines, Trucking companies and others will keep the profits to add to their bottom line. If that is true, then we should look at who stands to benefit the most going forward. Since Airlines spend approximately one-third of their revenue on jet fuel and if prices fall 20% doesn’t that translate to a stronger bottom line without much effort? Sounds like a good reason to scan the Airline sector for stocks like Delta and Southwest. You get the point… it is good to look where opportunities will improve going forward despite what is happening in the world. The only wild card to this situation is the Ebola situation as it will put more stress on airlines and travelers. Remember the objective is to outline what we believe could happen and then let the charts validate the truth or reality going forward.
Treasury yields continue decline with the 10-year bond now yielding 2.33% and the 30-year bond at 3.06%. They are both sitting on support and the speculation is for rates to rise in response to the Fed hiking rates next year. If we remember the FOMC minutes from yesterday, the Fed is worried about the stronger dollar… the impact of higher rates globally and low unemployment rate. In other words the Fed wants rates to remain low longer to help the world economies. I believe this is the greatest risk facing the financial markets currently… if rates rise too abruptly it could trigger a sell off in bonds raising yields and impacting the outlook for growth as cost rise proportionately to the cost of debt. The downside trade is TBF which is the non-leveraged short for the 20+ year Treasury bond. If Humpty-Dumpty (treasury bonds) fall as yields rise, all the worlds Treasuries and banks will not be able to put Humpty back together again. This is most definitely a sector to watch going forward.
Tomorrow is another trading day and it will have more in store than we want heading into the weekend. All we can do is take it one day at a time, find potential opportunities as above, maintain our patience, and let the opportunities unfold and then act with extreme discipline. Remain focused and disciplined as the market chops around.