Oil is The Grinch Snuffing out the Santa Claus Rally

The_Grinch_(That_Stole_Christmas)Stocks began an abbreviated week with moderate gains in another volatile session of trading as the last 40 minutes of trading provided entirety of the move off  last week’s lows.

It was a bit of a roller coaster session as opening gains of nearly 1% were all but wiped out 2 hours later. Market averages managed to find support late morning at Fridays close and spent the remainder of the day bouncing between there and the opening highs, including the late rally that ended the day with a bit of Christmas Cheer.

There are 6½ trading days left in 2015, and the only certainty is that Equity Market Averages will finish the year with varied returns.

The NASDAQ at 4969, +5% YTD will undoubtedly be the clear winner, fueled by the FANG quartet with supporting roles from MSFT +18%,  EXPE +45%, NVDA +60% and SBUX +45%.  Don’t be surprised to see the NASDAQ close north of the 5000 threshold, but a bit shy of fresh all time closing highs.

The S&P 500 at 2021.15, -1.8% YTD still has a decent shot at closing the year with a  fractional gain.  As ugly as the 2 day plunge was at the end of last week, The S&P 500 did hold the intraday lows of 1994 from last Monday.  That 1994 level also marked the closing high for the month of September, and lows from a sharp but brief mid November sell off.  Watch that 1994 level very closely on any sharp selloff the remainder of this year or early in 2016.

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The Russell 2000 at 1127.70, -6.4% YTD had so much promise at midyear, when it barely trailed the NASDAQ with a 4% gain the first 6 months.  No doubt,  the 10% decline in the 2nd half of 2015 makes the Russell look even worse, given that its relative strength seemed to “turn on a dime” at the end of the second quarter.  The Russell 2000 is 3.2% below its 50 day moving average and 6.7% below its 200 day MA, and only 4% above the late September closing low of 1084.

The DJ Transports at 7415, -18% YTD logged their closing high of 9217 on December 29 of last year, and it’s been a steady slide downhill for 12 months.  The Transports have garnered no benefit at all from the 60% to 70% decline in the price of oil as Airlines have consistently hedged away their fuel costs, for better or worse and rails have been hit by a sharp declines in coal transport.

A few weeks ago we thought the Transports had a shot at putting in a base between 7500 and 8000, but they have failed to hold both their September and August closing lows, and are the only Major Market Index decidedly lower than the closing lows from October ‘14 as well as August and September ‘15.

The technical damage done to the Russell 2000 and the DJ Transports during the second half of the year makes it very hard to buy into the scenario of “the next leg in the secular bull”, especially with the NASDAQ rally being heavily fueled by hyper performance from 8 to 12 stocks.  Of course there have been numerous opines arguing that large caps can extend their rally for 3 to 6 quarters without participation from small caps, but we view this as either wishful thinking, or select managers and strategists talking their book.

The Russell’s 3% beat in November vs. the S&P 500 fell flat and then some in December and it now feels that the Russell needs many months of repair to reverse the damage done in the second half of 2015.

Small caps and Transports are not the only segments of the market that have incurred major technical damage.   

How Oil is The Grinch Snuffing out the Santa Claus Rally

Oil continues to give investors great consternation, as Brent Crude briefly traded below the 2008/09 lows from the Global Financial Crisis before settling at $36.35 down 1½%. The premium of Brent to WTI continues to shrink, with basically unch at $34.75.  The $1.60 premium of Brent to WTI is down from $7 to $8 spread just before the OPEC meeting last month.

The one word mantra driving the angst in the Global Oil Markets continues to be Supply….Supply….Supply!!  as the IEA reports that excess Global Oil Inventories are approaching nearly 3 Billion (with a capital B) barrels.  This roughly equals 1 month’s usage of oil globally.

Every market has “unforeseen developments” that in the past has reversed what look like irreversible trends, but for Oil and Gas undergo a reversal of fortunes, it will take a real doozy.

Investors will likely give it their best Game Face to stage a ninth inning rally the last 6½ days of 2015.  Watch the breadth and whether the up volume is in market leadership names or beaten up short covering candidates.

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