Oil Fell So Stocks Should Rally, Right?
Another solid day of work in the lateral consolidation, except for SOX.
Oil fell so according to the Tuesday logic stocks should have rallied, right?
Kuwait protests, Religious killings in Egypt, Libyan oil facilities burning, street riots in Greece. But, there is nothing to worry about.
Mortgage applications jump on rising rates, professional buying.
Gasoline demand already dropping.
January wholesale inventories rise but sales rising nicely as well.
Semiconductors cut out of the rally. Just taking a rest or a leading indicator?
MARKET SUMMARY
Oil’s decline purportedly led to Tuesday’s gain. What happened then today?
For the second session oil traded lower. Tuesday’s gains were credited to oil’s decline. As oil lost even more ground Wednesday, surely stocks rose. No they did not. As I said Tuesday, a 42 cent drop in oil after a $10 run is not rally worthy, or at least was not THE cause of the Tuesday gain. Stocks are moving in a technical manner right now, consolidating a nice run and trying to come to grips with this high oil price. Yes oil impacts stocks; it is foolish to think $100+/bbl oil doesn’t affect consumers and businesses. Modest moves in an overall strong trend, however, don’t result in huge swings in stocks.
Indeed you would have thought the market should have declined more. Protests in Kuwait. Egyptian Muslims attacked Egyptian Christians protesting the burning of their church; 11 dead. Heavy fighting in Libya with plumes of black smoke rising over oil production facilities. Defense Secretary Gates saying no go to ‘no fly’ over Libya. Doesn’t matter as China and Russia would nix it on the UN Security Council anyway. Street riots again raging in Greece. The geopolitical
Economic news is good and not so good.
Economically the news was somewhat mixed. Gasoline prices are cutting into the demand for itself with a 2% decline this past week. Seems $3.50/gallon prices are already having an impact, not $4/gallon as the pundits suggest.
On the other hand, mortgage applications jumped 16%, the biggest move since June. Good news and we hear the move was driven by professionals buying on speculation. That is all part of the cycle of a housing slump and it is good to see. Interest rates had a hand as well as buyers stepped in as rates continue to rise.
Further, January Wholesale Inventories rose 1.1%, down from the upwardly revised 1.3% in December but still strong. The most salient fact: sales jumped 3.4%, the highest level since November 2009. Sales of cars, computers and commodities jumped but inventories still rose. That means producers are ramping up their manufacturing.
It also means they are hoarding. Note that commodities were part of the sales increase. What we are hearing from many small and larger businesses is that they are buying up the raw materials they will need to conduct their businesses. We all heard the story several weeks back about the t-shirt company buying up thousands of plain cotton t-shirts because of anticipated further rises in cotton prices. We know of businesses buying up nylon, abs plastic, etc. that they will need in their businesses as supplies are scarce.
You wonder why there is inflation? Way too much money in the economy is shoved into the financial and commodities markets. It is driving up prices, distorting demand, and thus distorting actions from producers. They fear higher prices and short supplies so they are buying and holding, and that exacerbates the pricing pressure as more product is removed from the market (many commodities ETF’s require physical holding of the commodity the ETF covers). The extra liquidity is trying to buy scarce products as well as a store of wealth as the money has to be put somewhere, and all of the sudden there is inflation. Artificial in cause, but that matters little to those having to find the materials they need to keep their businesses running.
That the Federal Reserve chooses to ignore this obvious inflation source is setting up stagflation similar to the 1970′s. It will be hard to avoid given the hole we have dug for ourselves with the massive debt and unwillingness to address fixes to the entitlement problem such as raising over time the age for receipt of Social Security benefits, allowing opt outs for younger people and buyouts for the mid-range contributors. It is a multiyear process, but you have to start and the sooner the better. It is the same issue facing us with weaning off of foreign oil: the argument is that it takes too long to make a difference, but if we would just announce the policy and get started then the dynamics would change almost immediately.
THURSDAY
Weekly jobless claims, Trade Balance, and Treasury Budget. The ‘usual.’ There is also the ‘usual’ with the ongoing geopolitical issues, oil prices, inflation, etc.
Then there are the new wrinkles, e.g. the action in SOX juxtaposed with the continued performance of retail and strength in transports. The semiconductor leadership is no longer, and the question is whether they simply fade and base once more or they head into a deep correction and threaten NASDAQ with the drop. Techs have not been pillars of strength of late as many cloud stocks cracked and fell. The dichotomy of the market that we noted a week back continues, and with the semiconductor decline the market consolidation, while still solid overall, is under more of a threat.
Some important days ahead. Will money again stay in the market and simply rotate to new areas as it did coming out of the November short correction? I have said this has the look of November, and if it is going to pull off another such move then it will have to find new sectors to push money toward. Unlike November, however, a major is breaking the 50 day EMA (SMH, the chip ETF, is doing so as well) and that is the wildcard on this pullback.
All this means is that we have to remain patient, keep our expectations in check on profit targets, and not try to win the race during this transition period. Most of the main indices still look just fine so we will continue looking for opportunity in places where there are good patterns and where money appears to be flowing. We can also continue looking for downside in areas were money appears to be fleeing (e.g. FCX and of course chips if they set up). The indices are in a trading range and a rather narrow one at that; thus almost by definition our moves at this juncture are more in line with trades versus longer term investing.
Again, be patient and don’t try to win it all right now. Transition periods are choppy as we have seen and can whipsaw you. Stay with quality patterns and good risk/reward. Take smaller positions. Even with good risk/reward your account can get chewed up some as the market grinds. There are no doubt still good movers we want to be ready to move in and we are moving into some good positions and getting some reward as with the gain taken even today as the market was basically a wash. Great, but again, don’t feel the need to load the boat. Not the time.
Keep watching good stocks in good patterns and watching stocks that are struggling and seeing their patterns rattling apart. Both can make us money, but I don’t want to be overextended just as the market makes a decision about where it wants to go. I still believe the action suggests another run with the trend, but the SOX action is another weight on the scale on the downside. That simply means, as with the day to day volatility seen before Wednesday, that the consolidation still has work to do.
