Things are heating up around the globe and macroeconomics is catching up with Europe. The EC currency traded all the way down to 1.1861 as crude oil broke the magical $50.00 a barrel level and Greece’s Tsipras promised to walk away from the troika agreement if he wins. The S&P 500 (^GSPC:SNP) responded with a 1.8% decline and the S&P energy sector closed down 4%. The Dow Jones (^DJI:DJI) had its worst one-day loss since early October and the NASDAQ (NQH15:CME) closed down 1.6%.
The drop in crude oil has been good for US consumers, with gas around $2 a gallon, but the liquidation of energy stocks has weighed on the S&P. With the Saudis continuing to cut oil prices, the share prices of most US oil producers have taken large hits and there doesn’t seem to be any letup in the selling. When crude oil does go up it’s not professional buying but short covering. The overall price action pointed to breaking $50 early on. When it happened, you could see the algos pushing for sell stops.
Listening to Angela Merkel
The March S&P futures (ESH15:CME) found support at an old trendline at 2010. Whether it retests the psychological support at 2000 or drops to the 1990 level remains to be seen, but it’s important for traders to maintain perspective. Yes, crude and the euro are continuing the slide they began in November, but the same strong US fundamentals that buoyed the stock market remain in place. And Angela Merkel has stated clearly that the Eurozone can weather a Greek exit. Even as Greece contemplates leaving, Lithuania has quietly joined the Euro, a clear defiance of Russian dominance and statement of faith in the Euro long term.
Historically, cheap oil drives recovery
We’re also looking at some historical facts we’ve been discussing with a few trader friends. You won’t see this in the media. Over the last 40 years there have been seven major declines in oil. In the past these declines either helped end recessions or bolstered growth in expansions. After the past six plunges in oil the S&P in the next 12 months has rallied +10% on average.
The current decline looks most similar to 1986, when real GDP increased 2.9% and the S&P rallied +15% during the decline in oil. US oil production is back at 1970s-1980s levels. Back then, declines in the price of Brent crude either helped end recessions or bolstered growth in expansions.
Yet another reason to see the crude oil drop in a larger context. MrTopStep has been calling for oil in the 40s for some time now, as has our friend Jeff Hirsch of Stock Trader’s Almanac. Now that it’s here, we see no reason to panic. There are 19 trading days left in January to set the tone for 2015 and a lot can happen, including a turn to the upside. We’ll take our cue from Angela Merkel, Lithuania, and whoever starts buying stocks at a bargain in the next couple of weeks and remain long-term bullish. We still won’t rule out the PitBull’s Thursday/Friday low but after that, we’re looking for some upside.
In Asia 10 of 11 markets closed lower and in Europe 6 of 12 markets are trading higher this morning. Today’s economic calendar includes the Gallup US ECI, Redbook, PMI services, factory orders, ISM non-mfg index and earnings from Commercial Metals (NYSE: CMC), Micron Technology (NASDAQ: MU), and A. Schulman (NASDAQ: SHLM).
S&P 500 futures down 3 in a row or down 3 out of the last 5 sessions
Our view: When I am wrong I admit it and yesterday I was dead wrong. I knew the ESH15 acted badly after Friday’s MiM imbalance showed $2 billion to buy. I knew Mondays have not been good and I saw how weak the DAX and the FTSE got as the early morning rolled on. I picked up on how weak the market was early on but I have to admit I didn’t react to how weak Europe and oil were until it was too late. If you didn’t sell the rallies you got smoked. That said, the ESH15 has been down 3 in a row for a total loss of 60.8 handles. Our view is we are getting close to a bounce. Does it happen on Turnaround Tuesday or later in the week? I think it starts today!
Dec 26 +5.4
Dec 29 + 1.6
Dec 31 -24.3
Jan 2 -6.1
Jan 5 -30.4
“S&P 500 New Year Slip & Slide / Crude drops 5%”
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 10 of 11 markets closed lower: Shanghai Comp. +0.03%, Hang Seng -0.99%, Nikkei -3.02%
- In Europe 6 of 12 markets are trading lower: DAX +0.53%, FTSE -0.44%, MICEX +1.91
- Fair value: S&P -6.82, NASDAQ -5.84 , DOW -78.58
- Total volume: 2mil ESH and 12k SPH traded
- Economic schedule: Gallup US ECI, Redbook, PMI services, factory orders, ISM non-mfg index and earnings from Commercial Metals (NYSE: CMC), Micron Technology (NASDAQ: MU), and A. Schulman (NASDAQ: SHLM).
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