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Thursday, January 22, 2015

Daily update 1/22 Lumber, oil and the economy

Draghi delivers.  The world is saved.  I wonder how many F bombs were being dropped by people that were short.  Why anybody would go into today short is beyond me.  If we have learned anything in recent years is that markets always react positively to QE on the day of the announcement.  That euphoria does not necessarily last long, but that is beside the point.  Today's ECB action was well telegraphed.  Lets see where we are.

SPX got back to where we were after those two blistering hot days on the 7th and 8th of Jan.  The last couple of weeks look like a rectangle forming.  We are now at the last high and the oversold condition has turned into slightly overbought.  The breadth was 75% positive.  There were 290 new highs and 33 new lows.  That is the most new highs since the 304 on 12/23.  That was three days before the all time high.  Have the sellers been vanquished or will they show up again?  Lets see what the futures chart looks like.

The futures have a blue price bar so they are above the upper Bollinger band and extended in price.  They are also at the top Keltner channel which can act as resistance.  While they closed above the 100 SMA at days end there is no confirmation of that move yet.  The ADX is extremely low.  I can't remember the last time it was this low at a short term bottom.  For the last few years we have been spiking down with relatively high ADX and reversing strongly.  We don't have the same setup this time. 

The ECB did what was expected and the markets reacted as expected.  What happens now?  All year long the market has acted goofy.  Strength has brought out sellers and weakness has brought out buyers.  Have the sellers run out of ammo?  They came out and sold some this morning right after the open.  The magnitude of that selling caught me a bit by surprise.  I see no sign at the moment the selling has been exhausted.  The VIX closed back under its weekly 200 DMA (17.35).  If it is still there tomorrow that should set up a test of the all time highs in SPX.  A close back above that level tomorrow would indicate a rejection and would likely send the market back to the lows.  I will not try to guess which happens at this point.  I looked at a bunch of indicators tonight and see some pluses and minuses with no clear edge. 

During the FED's QE program there was a lot of money from Europe that flowed into the U.S. markets.  Now the shoe is on the other foot.  The FED is threatening to raise rates and Europe has a trillion Euro QE plan.  Might the Europeans take their money back home? 

In XHB vs lumber I showed how the home builder ETF XHB was well correlated to lumber prices.  That makes perfect sense.  Now check out this rather interesting chart.

I have not seen anything this closely correlated to the ISM data before.  It is a bit hard to argue with.  The current weakness may be starting to enter the ISM data as those surveys have been falling the last few months.

Bespoke had some interesting facts on the oil storage data this week in Crude Oil Inventories See Monster Increase  They had this chart and text.

While this week's inventory report was delayed by a day due to Monday's holiday, the number crunchers at the Department of Energy may have needed an extra day just to count it all.  While traders were expecting inventories to increase by 2.7 million barrels, the actual increase was nearly four times that at 10.071 million barrels.  That is just a huge number for one week and is the largest weekly increase since March 2001, and the 16th largest weekly increase since 1983.  For the current week of the year, US crude oil inventories are higher than any year since at least 1983.  The next closest year was 2013, when total crude oil inventories were 363.1 million barrels, or 9% below the current level of 397.9 million barrels.

Oil stocks are nearly 20% higher then the average for this time of year and rapidly rising  The market is very well supplied at this time.  Without a significant pickup in demand that situation will last and keep a lid on prices.  So far the lower prices are not causing any increase in demand.

The ECRI data has been suggesting the possibility of significant weakness coming.  Both lumber and oil seem to be saying the economy is getting softer.  It may be time to start paying more attention to the econ data.

SPX and COMPX upgraded their short term trend to up.  The R2000 went to neutral.  Remember trends only tell us what the market has done and not what it is going to do.  The last change to down was short lived.  The uptrend might be short lived as well.


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