Tremors From the Oil Patch Rule the Day

US Equity markets gave up all of their gains from Wednesday, as Oil continued its slide lower, closing just above the Monday morning lows of $34.60.  On Wednesday  stocks responded favorably to the 0.25% hike in the Fed Funds rate by the FOMC.

The move had been widely anticipated and markets were totally ready for it.

While stocks rallied post the FED announcement and Yellen press conference, oil did not budge, closing Wednesday down more than 4%. The weekly inventory report showed both an unexpected build after the prior week’s draw down, as well as an increase in production.

That was a “one – two” punch to the gut of those looking for a further trading rally following Monday’s reversal. There has also been steady chatter in trading circles of record levels of short interest in Oil futures contracts, with the hint that a couple of positive headlines could spark a sharp short covering rally from traders closing positions before year end.  That now appears to be a “pipe dream” at best as Supply….Supply….Supply is 90% of all you need to know about what’s driving the price of oil.

Thursday morning crude oil gave us zero early morning lift, and unlike Wednesday afternoon, equity traders took notice.  There was hope Crude Oil would hold the $35 level as it did on a closing basis Monday. As this hope faded mid afternoon, so did stocks, and by the closing bell we were right back to where we were at the end of Tuesday.

If you’re looking for a silver lining in what deteriorated into a very ugly day the last 90 minutes, you might find it in the market internals.  Thursday the adv/decl was negative by slightly less than 2 to 1 on both NYSE and NASDAQ.

Breadth could easily be much worse on a day when market averages have losses of 1½% to 2%.   Wednesday the adv/decl stats were better than 4 to 1 on NYSE and 3 to 1 on NASDAQ.

While today will be a good test for the resilience of the Bulls, there will be a confluence of high volume action that may cloud any underlying direction from the market today.

First,  we have a quad witching option and futures expiration that will produce very high volumes on the opening for index options and around the close for single stock options.

In addition,  The S&P is having its quarterly and annual re weighting today that is tied to the closing prices at 4:00 PM.  The largest impact from the re weighting could likely happen within the energy sector, as many Oil and Gas names have seen their share price and market capitalization cut dramatically during the last quarter.

Do not underestimate how disruptive continual declines in the price of crude oil can be to the broad market averages as we move into 2016.  A break below the December 2008 low of $32.40 would put us in “no man’s land” absent of any meaningful price support level other the psychological round number of $30.

Tremors From the Oil Patch Rule the Day

Economists have been lecturing us for a year now on the positive “tax cut” affect from lower oil prices.   I Get It!!  We’re spending half what we were to fill up at the pump 18 months ago.  That part of the equation is very well known and understood.

What seems to be  very much unknown is all the tentacles of collateral damage that are done to the economy in a world of sub $35 Oil    Of course, there is nothing the market hates more than uncertainty.

Stay Tuned………

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