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Thursday, January 15, 2015

Daily update 1/15 More on oil

The bulls showed up overnight after the afternoon bounce and the sellers showed up at the higher prices.  It ended up being another smack down by the bears.  Lets have a look at SPX.

SPX closed below the 100 SMA again.  No panic so far.  Just people looking for strength to sell into.  That is how a lot of serious corrections and bear markets start.  The lower we go the more urgent the selling will be.  The breadth was 62% negative.  Once again broad based selling.  There were 205 new highs and 128 new lows.  It is interesting the new highs have held up so well.  I suspect it is money moving into perceived safety for those that must stay invested.  Closes below the 100 SMA have brought out the buyers, but this is really close to the last occurrence.  It seems much less likely to work this time.  It is not much further down to the 200 SMA from here.  Maybe we head on down there.  Lets peek in on the futures chart.

The last two days the futures have been testing the support line from the last swing low.  It held up today during market hours, but after the close the futures dipped down.  It is hard to say where they will be by morning.  We could be 20 points up or down the way things have been going lately.  All indicators are still bearish.  No need to fight it. 

There is a lot of SPY puts at the 200 strike which may have been supporting the market.  The sellers of those puts would certainly like to see SPY close above 200 tomorrow.  Can they get it done?  Will the close below the 100 DMA bring in buyers yet again?  I have seen some sizable option expiration days before.  If we continue down tomorrow it could get crazy.  The bulls have some work to do to get control back.  People are noticing how strength is getting sold into on a regular basis.  That can only lower confidence in the bulls.  Until they show they can put up a fight the path of least resistance is down.

IWM had been trying to hold up better then SPX lately.  However, it caved hard today turning its short term trend down to join the rest.

This is an interesting article on the oil price drop.  This Is Just the Beginning of the Great American Oil Bust  Here is a chart I found very interesting.  Its almost amazing really.

We went from 200 rigs to 1600 since the depths of the great recession.  That is around 8 times the count we have had since the late 90s.  I find that phenomenal.  I suspect this means energy was the single largest contributor to the economic growth we have seen in this recovery.  Here is another very interesting article that makes a pretty good case for oil being under $50 for a prolonged period of time.  A New Ceiling for Oil Prices  I found this interesting chart in there.

This chart is adjusted to today's dollars.  I suggest you read the article if you have time.  The main point is the time periods above $50 correspond to OPEC keeping the price high.  The time below $50 was when OPEC let nature take its course.  Even before I read the article I was convinced OPEC and specifically Saudi Arabia has decided to let prices go just like in the mid 80s.  If the price stays below $50 and the rig count goes back down to where it was in that period there will be massive layoffs.  We can see how fast they can shut them down like they did in late 2008.  If they cut like that again there will be way more layoffs since there are so many rigs.

I hear the Wall Street pundits out telling us not to worry.  The oil price drop is nothing but good.  It reminds me of Bernanke telling us the subprime crisis was contained shortly before the bottom dropped out of the global economy.  Nobody knows how this will all play out.  I am convinced the oil price is headed lower to stay for at least a few years.  I am also convinced there will be a lot of companies that will go under.  There is over $500 billion in high risk loans to energy companies.  This is way more money then the amounts in the 80s that ended up causing the savings and loan crisis that required a government bail out.  There is going to be considerable stress in the financial sector.  The 80s crisis was primarily contained in Texas since that was the only state doing a lot of drilling.  There are now many more states involved and it is a much bigger driver of our economic growth.  I am not sure we would be growing at all without all that extra drilling.  Anybody that says there is no downside risk to the economy is either uninformed, naive, stupid, or lying (possibly all the above).  There is clearly downside risk to the economy and possibly another financial crisis around the corner. 

I love this quote (tnx sunny).

"When you’re one step ahead of the crowd you’re a genius. When you’re two steps ahead, you’re a crackpot." –Rabbi Shlomo Riskin, Lincoln Square Synagogue, Feb. 1998 (Arizona Jewish Post; Sept. 18, 1998; p. B-10.)

I think differently then other people.  I usually see things long before they happen.  On 8/27/2003 I wrote this to my friends.

I have read where they now offer packages where the first few years the payments just cover the interest, no principle is paid off.  I guess this lowers payments so more people can afford the loan.  I also have heard some mortgage companies on the radio say it has never been easier  to get a loan, in fact you do not need to show proof of income. With interest rates at historical lows who would be in a hurry to loan out money in long term arrangements. The economy has been losing jobs for 6 months in a row and this has not happened since the 30s.  With jobs going by the way side and interest at historic lows who in their right mind would be loaning money out to people that might not even have jobs?  If the FED manages to reflate the
economy, these loans lose because interest rates will go way up.  If the FED fails, we end up in a depression and these loans will be defaulted on.  There is no middle ground here.  We will not have nirvana with low interest rates for the next 30 years.  This will be the biggest financial disaster in history.  I do not know if it is 2 years, 5 years, or 10 years away, but it is inevitable.

It turned out to be five years.  They say nobody could see it coming, LOL.  My life away from the market has been helped by my ability to look ahead.  I have changed jobs at opportune times because of it.  However, when it comes to the market timing is everything.  Being two steps ahead of the crowd can seriously hurt.  I knew stocks were in a bubble in late 1999.  Just like now they displayed all the major warning signs.  The market did not start down in earnest until the fall of 2000.  It was torture waiting for the majority of investors to figure it out. I have had that problem over and over again.

My brain is telling me this situation is going to turn into another financial crisis.  In  2009 the G20 all got together and started massive stimulus to restart the global economy.   China even started in 2008.  However, all that stimulus and easy money did not cause a self sustaining recovery.  I think just about everybody in power around the world realizes that.  Many market participants realize it also.   I suspect that is why they dump stocks whenever they think the FED might raise rates sooner rather then later.  Countries are now up to their eyeballs in debt a lot of which was added after the crisis.  I don't believe there will be a big coordinated effort to restart the global economy if it tanks again.  If it didn't work last time why would it work now.  I don't think the will to do massive stimulus will be there this time.  The global economy is much more fragile then at the start of the last crisis when emerging markets were humming along.  Things could easily get considerably worse then in 2008.  Time will tell whether I am a crack pot or just seeing two steps ahead.


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