OPEC failed the markets, but a Kuwaiti Oil worker strike came through
It was only a matter of time before the overly bearish supply fundamentals in crude oil were overshadowed by a supply disruption at the hands of Mid-East turmoil. What some believed on Sunday night was the beginning of another precipitous crude oil decline, quickly turned into a sharp energy rally on news of a Kuwaiti oil worker strike. Adding fuel to the fire was a report released this morning by the U.S. Energy Information Administration suggesting distillate stocks (heating oil/diesel/gasoline) experienced small declines. Remember, commodity markets don't need an actual change in fundamentals to turn things around, they just need the perception that it is possible. In other words, crunching supply and demand data isn't going to change momentum.
The direction of crude oil matters to financial futures traders because it is was a big weight on equities earlier in the year. Higher energy prices eases concerns of contagious debt defaults in junk bonds, and could eventually put layed off shale oil workers back on the job.
Despite a lack of economic data in the US, the markets found a reason to bring the ES to 2100ish.
The economic data schedule was skimpy in the US this week so investors were focused on news coming out of China. Word of Chinese exports tumbling 10% while imports also softened by 1.9% triggered global selling in stock indices. However, as has been the case since early 2016 market corrections are merely a signal for dip buyers to put money to work. Overnight and early morning losses were quickly shored up by afternoon trading.
On the lows of the day, technical oscillators were suggesting the sell-off had gotten ahead of itself. As it turns out, they were right. However, the lack of volatility has become silly. A 50 point decline in the S&P shouldn't constitute an oversold market.
Tomorrow's docket is relatively busy. We'll digest inflation data along with the latest consumer sentiment readings.
Inflation in check and economic data steady
Yesterday we learned that October retail sales ticked to .8% beating expectations of .6%. We saw similarly positive news from the Empire Manufacturing index which was a positive 1.5 for the month of November despite a negative reading of 6.8 in the previous month. This morning, the government released the latest Producer Price Index (PPI) suggesting that inflation was stagnant. We'll get a clearer picture tomorrow morning with the CPI (Consumer Price Index) report, but if it is similarly benign we expect Treasuries to move higher on the news.
From yesterday's newsletter just in case you missed it:
Although it isn't grabbing headlines like the Treasury market is, the US dollar index likely holds the key to our financial future. If you recall, a stronger dollar puts pressure on commodity prices such as gold, crude oil and even the grains. We are also seeing money from overseas investors rotate into the greenback in search of yield and equity market performance. However, if the dollar continues higher, there could be trouble ahead for domestic asset prices.
For instance, if the dollar index breaks above 101.50 it would likely result in a breakdown in commodities (below support levels which have been in place for months, and in some cases years). Similarly, Treasuries could continue to plunge. After all, if foreign investors are paying "top dollar" to exchange their currency to purchase securities, current Treasury yields won't be worth their while. They'll be looking to the equity market for gains.
The Fed and triple witching Friday are generally bullish events for the stock market
Although the CME has mitigated some of the impact of the triple witch with their addition of weekly expiring options, the event still influences the quarterly expirations (March, June, September, and December). The most common course of action is a short squeeze going into expiration. In this particular instance, we are referring to Friday, June 17th. The squeeze higher often extends itself into the time the June contract goes off the board, which will be at 8:30 am Friday morning. Accordingly, those wishing to get bearish this market should look for opportunities late next week.
Similarly, Fed meetings have generally enticed S&P buyers in the days before the FOMC's interest rate policy announcement. The two-day meeting begins on Tuesday, so we could see some buying early in the week.
This is what professionals call a WTH market (the "H" stands for heck).
Markets undergoing vast changes in their technical outlook on a minute to minute basis are best described as WTH markets. I have no doubt that investors who have been trained, and thus far rewarded, to "buy the dip" were putting money to work early this morning as the S&P 500 screamed higher, but I also have no doubt they are now remorseful buyers.
The market looked equally as horrible on the close as it looked fantastic on the open. In such markets, typical market analysis techniques simply don't work and traders attempting to chase prices back and forth will wish they had never heard of momentum indicators.
In the past, WTH markets have been followed by big moves so traders should approach the S&P with more caution than usual.