Equities and the Economy

After six consecutive weeks of gains (the longest positive streak of the year) U.S. equities stumbled yesterday with the Dow falling a little over one percent (1.01%), 180 points, to 17,730. The Nasdaq fell the same percentage as the Dow, 52 points, ending at 5,095. The S&P 500 fell 20, 0.96%, to 2,079. Investors are still digesting the very strong jobs report but I think a couple of other things are going on here. First, we’ve had a really good, strong rally of late and the market lost momentum last week as the indexes approached or hit previous highs. Technically speaking, we hit resistance. You need to keep feeding a bull for stocks to go higher. For the bears to emerge, you don’t need selling, just a cessation in buying. Second, I believe the trigger, or excuse, for the selling was the really lousy trade data out of China over the weekend. The report stated imports fell 18.8% in October and exports fell 6.9%. So we had the ball teed up for a pullback and the Chinese kicked it off with a shank of the tee.

There was no fundamental economic news of consequence so let’s move on to today. The Asian markets closed mixed with Hong Kong’s Hang Seng taking it on the chin closing down 1.43%. The other two major bourses, Shanghai Composite and Japan’s Nikkei, closed pretty much unchanged. The European markets are trading on either side of unchanged. Here in the U.S. we’re starting out quietly with Dow futures down 20. Chatter.

We are in a bull market. One should not be short. That being said, pullbacks/corrections come in bull markets. We don’t go straight up. Technically, the S&P 500 is right on a medium term support line dating back to early October. We need to hold this support. If we break it, however, that doesn’t mean we’re going into a bear market. It may be a buying opportunity.

Oil

Oil prices continue to ease yesterday with WTI falling 42¢ settling at $43.87 and Brent slipping 23¢ to $47.19. The oil market continues to be weighed down by abundant production. In fact, Russian production is hitting records and the Iranians are preparing to dump 500,000 bbl/day on the market as soon as they get the green flag, and no other OPEC nation is going to cut production to make way for them. They will be aggressively bidding for market share.

Looking at the tem structures, which give a clue to the global supply and demand balances, the contango is widening a bid, i.e. the spread between the front month and deferred months, which means oil is more actively bidding for storage which means on the margin supply is increasing relative to demand. This morning oil prices are meandering being down 14¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Monday morning’s weather forecast took the wind out of the bull’s sail showing an extended period of materially above normal temperatures for the upper Midwest and northeast in the 6-15 day time frame. This brought out the bears who pushed natty 7.1¢ lower settling at an even 2.300. The bottom line here folks is natty prices are going to remain under pressure as long as the weather forecast keeps showing above normal temps for the upper Midwest and east. And the longer the warm temps persist through the winter the heavier the weight. However, if we ever get a below normal temperature forecast you’ll see prices pop 20¢ in a day. This morning the extended forecast remains warm but temps for the next few days are more seasonal in the heartland which is putting a little bit of a bid into the cash market and natty is up 4.5¢ as I write.

Elsewhere

Contrary to what you were taught, not everyone died at Little Big Horn. As we all know, Little Big Horn was where General George Armstrong Custer took 264 men and were hopelessly outnumbered by 2,500 Sioux led by Sitting Bull, Crazy Horse and Rain-in-the-face. Custer and his men fought valiantly but every one of them died. Everyone that fought died. What I bet you didn’t know was that part of Custer’s original contingent of men included thirty Arikaras, six Crow and four Sioux Indians, whom he had hired as scouts. Before the battle and after a quick reconnoiter, the Indians informed Custer that he was hopelessly outnumbered and strongly urged him to wait for reinforcements.

Custer, however, always the headline seeker, did not want to share his presumed glory with anyone else and insisted on pressing forward with the attack. At that point, one of the Crow scouts shed his uniform, saying that since he was going to meet the Great Spirit, he wanted to be dressed as an Indian, not a white man. Custer became furious at the action and subsequently fired all of his Indian scouts. No one knows what happened to the scouts, but one thing is for sure, they didn’t die with him, although they apparently were willing do so.