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Friday, February 6, 2015

Daily update 2/6 More on oil

A reversal bar at resistance.  Is the market going to reverse yet again just after getting into a short term uptrend?  Lets look at SPX.

There is two possible topping patterns going on.  We have the short term triple top that may be forming since the start of the year.  There is also the potential head and shoulders top forming since last Dec.  Price got up enough today to make a pretty good right shoulder if we turn down from here.  While SPX was up 10 points this morning the breadth was barely positive.  It ended the day 61% negative.  In addition the NYSE ticks spent most of the time in negative territory.  This indicates that even early in the day there was wide spread distribution going on.  There was more news on Greece in the afternoon that caused the market to break down.  It looked to me like it was going to do that anyway even before the news hit.  The move might have been exaggerated by the news though.  It was positive news on Greece that sparked this rally in the first place.  That news was refuted the next day, but the market kept going up anyway.  I guess it might be fitting if the bounce ends on Greece news.  There were 145 new highs and 15 new lows.  The numbers were about the same as the last two days.  One day does not make a trend as they say, but is a bearish looking candle at resistance.  Will the bulls show up Sunday night to ensure the rally continues?  Lets see what the futures chart has to say.

The futures got very extended from the 18 SMA once again and could not maintain that separation.  They bounced significantly after the 4 PM market close for some reason (or maybe no reason at all).  That surge caused a meltdown in the VIX.  It went from 18.30 down to 17.29 all after the market close.  I have seen a few sizable moves after the close, but that one is huge.  It took it from being well above the weekly 200 SMA to just slightly below it.  Is that bullish for Monday or just some after hours goofiness?  You got me.  It saved the futures from mildly bearish actions of closing below the 6 SMA and back inside the Keltner channel.  Maybe it is another stick save by the bulls and maybe it is totally meaningless.  I guess we will find out on Monday.

Today's reversal candle at resistance looks bearish.  However, the short term trend is still up.  The bears need downside follow through to take control of the market.  The bulls could easily show up again and push us higher.  Today's employment report was stronger then expected and sent interest rates soaring higher.  I am sure that raised fears of FED hikes sooner rather then later.  That is most likely why the ticks were spending so much time in negative territory while SPX was positive.  Will people continue that line of thinking next week or will they have completely forgot about it by Monday?  Beats me.  Investors have a very short attention span anymore (just like people in general).  A close below today's low would be an early sign we might be headed back to the lows.  A close below the SPX 50 DMA (2044) would be a pretty strong indication the bounce is over.  There is probably resistance from 2075-79 from the late Nov. and early Dec. price action.  Above that should green light a new high. Who will show up on Monday the bulls or the bears?

This is a great read by Jeremy Grantham from GMO.  Why Were We So Surprised?  I found this snippet very different from what I usually hear.

Probability of a Net Drag on GDP
It is important to remember (as mentioned last quarter) that the global economy benefits dependably only when the real costs of finding oil go down, which is absolutely not happening now. When the costs of finding oil are in a rising trend, then falling prices merely transfer income from the sellers to the buyers. Like all income transfers, there can be a short-term benefit if the buyers have a higher propensity to spend. (An income transfer from the very wealthy to the poor is a much more dependable plus in this respect!) The problem here is that oil companies are receiving such a painful setback that they are cutting back on current spending immediately as well as reducing future spending plans and, because everyone knows about these announced cuts, it hurts the confidence of those affected. The typical recipient, in contrast, may or may not change the way in which he spends his, say, $100 a month, savings from cheaper oil. In addition, some developing countries are quite sensibly taking this opportunity to lower oil subsidies to the general public, which will further dampen the response. There is a completely separate drag on GDP from the oil price drop that has not been widely discussed: deficient GDP accounting. The many comments that predict a substantial net stimulus effect have, not surprisingly, focused on economic reality, in which stimulus and drag seem reasonably equal. But GDP does not measure reality: it measures gross expenses, and the new total value of oil (and natural gas) production has just dropped by an amount equal to a remarkable 3% of GDP! The offsetting beneficiaries, like airlines, will not raise their prices equivalently, but will reluctantly reduce them. On a deficient accounting basis, therefore, there is a substantial drag on stated GDP. So, be prepared.

Not being an economist myself I don't really know the details of GDP calculation (never cared to dive into it because I believe it is largely fudged after all it can be revised multiple % years later).   Everything else I have read from Mr. Grantham has indicated he is of high intelligence and extremely knowledgeable in everything economic and market related.  I was actually stunned by the last few sentences in that paragraph.  Based on the last production figures I saw of around 9 million barrels a day in oil the 3% of GDP reduction looks about right at $50 a barrel.  However, for the U.S. that is offset by the decline of imports which is somewhere around 6 million barrels.  That means the actual reduction to U.S. GDP is probably more like 1%.  On a global scale the production is around 90 million barrels per day the last I saw.  That makes the reduction to global GDP at $50 from $100 of about $1.6 trillion.  With global GDP at $77 trillion that is roughly 2%.  Global GDP grew roughly 3% last year so that 2% would be a considerable chunk.  Obviously if oil drops into the 30s it would be much more severe.  There are other interesting considerations in that article.  I highly recommend spending a few minutes reading it.

Just to show I am not the only person (lunatic) claiming the market is weak internally.  The Stock Market Is Weaker Than It Looks

This is a great spread sheet on S&P company earnings (tnx CF).   http://us.spindices.com/documents/additional-material/sp-500-eps-est.xlsx?force_download=true

The market and sector status pages have been updated.  Have a great weekend.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.