Market-Moving Rumors

To anyone holding long positions in the stock market, yesterday’s batch of rumors and innuendo was likely seen as a savior. Prior to two market-moving rumors – one of which turned out to be true while the other, as expected, was pure fiction – stocks appeared to be in a world of hurt from a technical perspective and it looked the bears were making plans to stick around a while. However, unless reality catches up to the projections and oil prices stop climbing, the rumor-driven rebound may have just delayed the inevitable.

Stocks initially opened lower on Thursday and then, as usual, rebounded (fading the opening move in the market has become a fairly common play these days). And with the major indices flirting with important technical levels on the charts, it looked like the dip-buyers had relocated their mojo and it was back to business as usual at the corner of Broad and Wall. But with oil prices climbing on word that Libya’s production had been reduced by 75%, traders began to take oil prices higher and stock prices lower. And before long, the S&P had broken down and both the Dow and NASDAQ were sitting at important short-term support levels.

Word that the Saudi’s were pledging to open up the spigot post haste definitely helped the mood. However, the gang in the oil pits recognized that it takes time to get the lost supply replaced and as such, they weren’t buying the rumors that everything would soon be back to normal in the world of bubblin’ crude.

However, at about 2:00 pm eastern standard time, the big rumor of the day began to be circulated – Moammar Gadhafi (and for the record, I’m still not sure which spelling is correct as Gaddafi, Qaddafi, and former President Reagan’s “K. Daffy” all seem to be interchangeable) had been shot and killed.

In a clear case of hearing what you want to hear, the rumor, which, interestingly enough, was found “on Twitter” but not actually widely circulated by Twitter users, provided oil traders an opportunity to take profits on what has been a nice long-side trade and stock traders a reason to cover their shorts.

Although there was absolutely no substantive backup to the rumor and no source was ever cited, the thought that the current crisis of crude could be basically be solved so quickly likely went through the minds of traders in the oil pits. And just like that, oil began to be sold and actually finished down on the day.

With oil heading lower and the talking heads on T.V. trying desperately to come up with reasons to explain the sudden turn of events, stocks began to rally off their lows. And before you could check the spelling on Gadhafi’s first name (yep, there is more than one), the NASDAQ and Russell 2000 indices were up while the S&P and Midcaps were only down a fraction.

So, the bottom line is that it was a case of rumor and innuendo that saved stock investors from another ugly day on Thursday. And with the expectations that Saudi Arabia will be able to pick up the slack in oil production rather quickly, this problem may be solved. But then again, with a “Day of Rage” planned for today in Iran, we may not have heard the last from the Middle East for a while.

Turning to this morning… Foreign markets are up nicely for the most part on word that the Saudi’s have already boosted oil production to 9 million barrels per day. And although oil futures are higher at the moment, they remain more than $5 below where they stood 36 hours ago. As such, Wall Street is looking to open higher.

On the Economic front… The government’s first revision of the nation’s fourth quarter GDP shows the economy grew at an annualized rate of +2.8% during the quarter. This was below the consensus expectations for a growth rate of +3.3% as well as the first estimate of +3.2% but still above the Q3 rate of 2.6%. Consumer spending came in at a rate of +4.1%, which was 0.3% below the first estimate’s level.

We’ll also get a look at consumer sentiment from the University of Michigan at 10:00 am eastern.

David D. Moenning
Editor: The Daily Decision