June 4, 2016
Markets Run Into Resistance
Roll out those lazy, hazy, crazy days of summer
Those days of soda and pretzels and beer
Roll out those lazy, hazy, crazy days of summer
Dust off the sun and moon and sing a song of cheer
Nat King Cole hit from the mid 1960s
The mainstream financial media is indeed cheering. That group is certain the markets have been ‘correcting’ since November 2014 when the Dow Transports topped. The vigorous rally from the February 9 low to the April 19 high reinforced that thinking. Indeed the Dow Industrials jumped from 15,500 to 18,000, up 16%. So everything must be okay, right? Indeed Bank of America Merrill Lynch (yeah the same guys that had to be sold an hour before Lehman croaked) notes equities have “attracted $1.5 billion in the last eight weeks.” Well yes, this is how a ten-week high is made. Indeed the Russell 2000 is making a new high for 3026 as I write.
The tell tale signatory however is still the Transports. The Transports have not moved higher since their April 19 peak. Transports would need a 300+ point rally to take out the double top at 8100 and record a new Dow Theory Buy Signal.
So far that is not happening. Fundamentally auto sales are slowing even with zero percent deals and still relatively inexpensive gasoline. Brick and mortar stores are increasingly pressed with more Americans shopping on line. Health care stocks have been on the rise though it is unclear how the Affordable Care Act will be altered this next year. Insurers are seeking double-digit rate increases which hardly sounds affordable.
Energy
This market has also run into resistance. Crude oil has doubled from the February low, recorded just days before the stock market low. West Texas Intermediate has vaulted above its 200 day MA now at $40.55. It would not be surprising to see crude back up and test the 50 day Moving Average now around $44.
Natural gas has put in a stunning performance the last few days. It has jumped from $2.10 to $2.41. Now it needs to record a weekly close over the January high at $2.50.
And as always, the low at $1.60 in March occurred during headlines confidently predicting a plunge to $1.00.
The End of OPEC?
We recently reported on Saudi Arabia’s ambitious bid to shake off its dependence on oil revenue. And this is coupled with replacing foreign workers with Saudi citizens. A side benefit of the oil revenue is that few to any actual Saudis have real jobs. This is causing problems as qualified workers are being jettisoned and replaced with unqualified employees.
But I digress. It is hard to see how OPEC will continue as a viable organization. It has never really managed the price of oil ever since the collapse of the second embargo in 1981. Prices have been all over the chart no matter how many meetings were held in Vienna. But now we have a real vision of income inequality.
Hugo Chavez socialist dream has bankrupted Venezuela. The country is now a failed state with the inept government continuing to take over businesses it cannot run. There is no beer or toilet paper. Nigeria is on the rocks as well.
And then there is bad boy Iran who will not agree to anything with anyone other than, of course, John Kerry. After being out of the loop for years, Iraq wants to export all the oil it can.
Meanwhile the House of Saud has wanted to maintain market share which has meant no pulling back on its production. Eventually cartels fall victim to their own machinations. And that is happening with OPEC as they meet once again.
The Bottom Line
Look for stocks to make a ten week bottom (from the April 19 high) the last week of this month. Oil probably needs some consolidation and correction before it advances again. Look for that market to be on hold until July.
Our view is more lazy and hazy than cheer….
Comments