Oil ‘decline’ credited with stock gains. Right.

Oil went down on Tuesday, dropping to $105.02, -0.42. That was credited with near 1% gains across the board on the stock market. NASDAQ, +0.75%; SP500, +0.9; Dow, +1%; SP600, +1.6%; SOX, 0.1%; NASDAQ 100, +0.4%.

Were the gains due to oil suddenly falling $0.42 after rising $10 in the past week (going back further, a $25 rise in a month)? That is probably not the case. Maybe it had something to do with rumors about an “extraordinary meeting” for OPEC. Iran is chairing OPEC right now, and it said that will not happen. Iran does not want any increase in production, of course. It wants the prices high and it wants pressure on West. Saudi Arabia wants to keep things easier for the West and wants to produce more oil. In fact, they have already said they will increase their output, so maybe it was not that either.

Was it simply another day in the trading range? Stocks have been bouncing up and down almost every second day since this lateral move began. It started off with a heavy fall, and then a second fall with a bounce off the low. Then you have it up a couple of days, down, up a couple of days, and down again. Now it is up a day again. Every day it is back and forth, and there is quite a bit of extreme intraday as well.

There is day-to-day volatility and intraday volatility. That tells you the bulls and bears are really fighting it out. One day the bulls land a punch to the jaw, and the next day the bears counter with a gut punch that bends the market over and sends it gasping. No matter which index you look at, the action shows a lateral consolidation that shows the stock market is not overrun by the sellers.

Indeed, looking at SP500, SP600, and even the Dow, they are making higher lows in the consolidation. This is basically good action. The movement on Tuesday may have been helped by the fact that oil did not rise $2.00 on the session, but that was not necessarily the reason that stocks rebounded. They are just moving back and forth in their same old range.

One day some news may be negative, and that gives impetus to fall back in the range. The next day the news is better and the market bounces. Again, on Tuesday, I think it was more that oil did not rise $2.00 on the session versus it falling $0.42. Either way, the market continues to move laterally in what is a good consolidation, whether there will be an “extraordinary meeting” of OPEC or not. Why do they call it an extraordinary meeting? Why not just a meeting to discuss oil production given that prices are so high? I suppose that is for OPEC to decide.

There are a lot of counter-themes with respect to the oil market. There are rumors of an extraordinary meeting. There are other rumors quoting Iran as saying it will not happen. Then there are other rumors talking about a “Day of Rage” still planned for Friday in Saudi Arabia. As I said last night: So much for appeasement. Pull out the old Neville Chamberlain book of Nazi appeasement; you can see it never really works.

It reminds me of what the President said in the movie Air Force One. “What happens when you give a mouse a cookie? He will want a class of milk.” That is basically how appeasement works. In any event, there are plays on both sides of the equation. You can play pin-the-tail on the reason for the move, but it was time for a bounce if you look at the stock market indices. That is exactly what the indices did given a little breathing room by a lessening of pressure in oil prices.

WEDNESDAY

Some economic data is coming back into the picture on Wednesday. There are crude oil inventories, the mortgage index, and wholesale inventories. It will be interesting to whether inventories rise or not and if sales rise. We want to see sales continue to ramp up after slacking off recently.

There is not much in the way of economic data, so we will be focusing more on what happens in Libya and Saudi Arabia as the day begins. Of course we will also see what the oil prices are doing. They have somewhat lead the market around by the nose back and forth each day. Again, a lot of what we have been seeing is just a lateral consolidation where the buyers and the sellers are still bashing it out against each other. Neither of them has a clear cut advantage. Or maybe they do   the market is not selling off. It has pulled back slightly and is now moving laterally and making those higher lows I discussed earlier. I would say the bulls have a slight advantage.

It looks good, but we cannot forget the old Field of Dreams admonition: “Watch out for in your ear.” Do not assume anything is given. The consolidation looks like what we want to see and there are good stocks setting up quite nicely. Indeed, we are starting to nibble at some positions. We are taking them as they set up and start to show moves. That is exactly what we want to see, but do not forget that things could still break down.

There are a lot of problems out there. There is the oil crisis, and anything dealing with geopolitical tensions and unrest that could pop up anywhere at any time. There is still the “Day of Rage” to come in Saudi Arabia this Friday. We could also have other problems. Central banks may do something crazy, although I doubt that. The Fed could start talking about taking the liquidity out of the system. That probably will not happen anytime soon, but these are the types of things that can pop up and start to take the punch bowl away from this liquidity-driven rally.

For now, the liquidity is still there. For now, the market is assuming it will still be there. The market is going to continue to push the $77B coming in every month into the stock market and commodities markets. That is likely to continue until the well runs dry. We will look for continued plays in the direction of the liquidity push knowing that at some point it will end. Also know that geopolitical actions could upset the cart temporarily.

With that, we will keep looking for some good upside, and there are some nice downside plays here, too. As the market consolidates, sectors are breaking lower and struggling. We would like to take advantage of those, although that is still tough going with the liquidity bid under the market.