Equities and the Economy

This one really, really hurt. After two losing sessions we were getting a great rebound yesterday morning with the Dow up as much as a huge 282 points in the first hour of trading. But as I’ve so often said, it’s the closes, not the opens, that count and as we’ve seen already a few times in this young year, morning rallies have disintegrated during the trading day. And that’s what happened yesterday with the Dow logging a loss of 27 points closing at 17,614, the S&P 500 off 5 points to 2,023 and the Nasdaq dropping 3 to 4,662. Folks, take it from an ex-trader, this is horrible, horrible price action. Bull markets open weak and close on their highs. Bear markets do the opposite and that’s what we got yesterday nearly forging a “reversal” to the downside. The “technical” signs are very, very ominous. The support line on the S&P 500 chart dating back to October of last year is under assault. Even the slightest further weakness shall render the trend line broken. Folks, the bull market’s very efficacy is in jeopardy. In what may be the understatement of the day, my antennae are up!

Yesterday’s lousy price action did not escape traders and investors and is leaving its mark this morning around the world with all the Asian markets closing lower, the European markets all currently trading lower and Dow futures down a huge 248 points. So what’s causing all the consternation? It all started with the falling and well discussed and analyzed price of oil but contagion is all around because now commodities in general are getting whacked, and getting whacked hard. For example, all the base metals prices have been collapsing with copper, the PhD of global economic indicators, trading below $6,000 per ton and its weakest level in more than 5 years. All this commodity weakness raises fear in investors of global deflation which is obviously bearish of equities for when commodity prices are falling it’s a flashing neon sign saying global growth is anemic. The only thing that’s going to save us in the short term is a QE from the ECB. It is meeting January 22nd but the Greek elections are after than on January 25th so I have no idea how this is going to unfold.

Oil

The attack on crude continues with WTI falling 18¢ yesterday closing at $45.89 and Brent losing 84¢ settling at $46.59. That spread continues to decline with it now being 70¢ premium to Brent. I remember a few years ago when oil production from the Bakken in North Dakota began skyrocketing with no accompanying growth in infrastructure and that spread hit $25! The term structures in oil continue to wane bearishly with the contango getting wider and wider. The one year spread in Brent (Feb ’15 vs. Feb ’16) is now out to $12.02 which means Brent one year from now is trading at a 26% premium to Feb ’15 Brent which is an enormously huge premium and evidence that oil production today is very, very strong but demand is not and hence oil continues to bid for places to be stored. Each marginal unit of storage is more expensive than the previous one and if one wants to store his production he must cut his price to cover that storage cost. This morning WTI is actually hanging in there for a change this morning not being down but up 33¢.

Natural Gas

Natural gas is bucking the overall commodity price weakness with the February contract closing up 14.8¢ yesterday at $2.943. I believe two factors are at work causing the rise. First, it’s been and has been cold and demand has been strong for natty. For example, tomorrow’s EIA natural gas report is expected to show a withdrawal for last week of 225 Bcf which is way above normal and next week’s report for this week is also way above normal. Second, and this is critically important, prices recently were at or below coal prices. When I had my trading company I told my traders “Do not sell natty below coal prices.” Yes, natty can, has and will trade below coal, but it’s a bad trade.

After a strong day yesterday natty is again popping being up 16.3¢ and again above 3 bucks. Yesterday the weather forecast began shifting colder and the trend continues today with below normal temperatures penetrating the upper Midwest in the 11-15 day time frame giving traders a reason to buy CH4.

Courtesy of MDA Information Systems LLC

Elsewhere

Ohioans are jubilant over Ohio State’s underdog national championship victory on Monday but there are about 500 folks that are downright effervescent! They are the ones who purchased at least $1,999 in furniture, mattresses or accessories from Morris Furniture from December 17th to January 1st, and got their furniture for free! The company ran a promotion that if OSU beat Oregon by at least 7 points they’d get their furniture for free. For those of you that don’t know, OSU won by 22. Super Bowl is coming up!