Street Vision: Oil on a Slippery Slope

While most Major Market Averages, settled the day close to unchanged, there was plenty of price action in the oil sector, as well as a smattering of individual names.  In a trading session filled with now familiar levels of volatility, the S&P 500 (^SPX) and NASDAQ Composite (^IXIC) both gave up their late morning gains of better than +1%, and later recovered from moderate losses during the last hour to close basically unchanged, albeit with the smallest of final numbers settling in the red.

The Dow Jones Industrial Average (^DJI) traded in a 300 pt range to close -0.40% lower at 25,286.  The 100 point decline in the DJIA was almost entirely attributable to Boeing (^BA) -$7.52 at 349.50, UnitedHealth (^UNH), -$3.16 at $269.22, and ~2 point declines from Exxon (^XOM), and Chevron (^CVX) in a heavily battered oil sector.

The DJ Transportation Average, +0.6% at 10,433  was the out-performer, despite giving up over half of what was a +1.7% gain at midday.  The Transports have began to  slightly outperform the last 2 weeks, and given their history of leading market turns the last few years, we’re going to keep these names front and center for signs that the lows for Q4 may be in.

Macro Events in Focus

In the aftermath of Mondays 2%-plus selloff, 2 macro stories were pervasive Tuesday.   First, talk that Brexit negotiations between the EU and UK are close to a deal gave the market a boost during the morning as well as sparking a strong rally in the British Pound.

The rally in the Pound is worth watching, as the US Dollar actually found gravity Tuesday, after closing Monday at another 18 month high. Clearly, any sustained rally in the Pound could cap the move in the dollar, benefiting US stocks.   We’ve been here before with Brexit negotiations, and it’s not surprising that enthusiasm faded during the afternoon, absent specifics.

Secondly, banter over the relentless decline in crude oil escalated during the afternoon.  Tuesdays decline of -8% marks the 12th straight day of lower prices.  With crude declining steadily for over 10 weeks, and the steepest decline hitting after 2 straight weeks of daily declines, there is more than a hint of capitulation in the air.

There is no doubt that the world is awash in oil, and that many professionals as well as part time punters, totally misplayed the Iran Sanctions trade with regard to oil.  In mid August, with Oil at $80, the talk was of $100 crude by year end.  Now with Brent at $65 and West Texas at $55, it begs the question of whether the pendulum has swung too far in the other direction.  Here are just a few data points we picked up late in the day:

• The USO ETF is 20% below its 50 day moving average.  That’s a lot.

• On a 14 day RSI metric, crude oil is the most oversold ever.  EVER!

• Nat Gas inventory is near a 15 year low heading into the winter heating season.

• Nat Gas  traded above $4 today.

• A lot of energy traders were long crude oil and short nat gas.  That trade was being unwound Tuesday, likely putting additional pressure on crude oil.

Now, we’re NOT in favor of the “falling knife” trade, but that last bullet point speaks loudly to “forced liquidation”.   That being said, there is no reason that crude can’t go lower.

Remember trading 101: “Just because something is oversold, doesn’t mean it’s a buy!”

There is no doubt that savvy contrarians and value investors alike are getting alerts on their risk/reward models for solid names in the energy patch. In the interest of Full Disclosure, we DO NOT recommend individual trades or individual stocks, but rather highlight hot topics of the day, and occasionally opine on trends and aberrations that jump off the monitor.

Concerning the oil trade, the only statement we can make with complete certainty is to expect move volatility both in crude and single stock names in the sector.

“This is an Adults Only Trade”, on either side of the market.  

The Early Line for Wednesday

U.S. Stock Index futures have already swung from Red to Green in very early morning trading as markets in Europe have recouped most of their early losses and the FTSE has actually gone green, 3 hours into their trading day.

Crude oil is trying to make a stand, trading modestly higher, although with what looks like little conviction so far.  The weekly EIA Crude Inventory report typically released on Wednesday at 11:00 AM will be pushed to Thursday due to Monday being Veterans Day.