The last time equities fell with such conviction was after GE reported their horrific quarter; and the market tumbled nearly 2%, as a result. Today we ended lower because of a confluence of events. First, the market was getting a little ahead of itself. The S&P 500 had gained about 8% since the GE washout with very few finishes in the red since that time.
But it’s the size of the decline, and the acceleration of the selling into the close that we need to take note of. Though we were in the red for most of the day, the deterioration of the financials (one of my favorite sayings from a few months ago) dragged the market lower into the close. Take a look at the one day charts of C, LEH and MER, and observe how the volume skyrocketed as these stocks tumbled into the closing bell. I have rescinded my stance that you can short any financial, but – outside of GS – I have never suggested owning any of these stocks.
Could it be that the price of oil is will finally have a negative affect on the market? Here’s what I theorized in yesterday’s post:
Eventually the price of oil may start to shrink our economy at a faster rate, but the market has been able to shrug off daily record highs. If energy prices become a true headwind against most equity prices, the energy stock will still reach higher ground. Stay long with this strength.
Well we didn’t see the energy groups advance today, but energy prices may start to pull on the strings of the current rally. A lot of analysts are predicting Crude Oil will reach $150, $200, $240 and beyond. You’ll get no such prediction from me. All I know is all signs are pointing to energy higher prices. When today’s weekly inventory number was released at 10:30 this morning, it showed a build in domestic crude supplies. Now take a look at the one day chart of the USO. The ETF immediately traded down about 1.5%, but just an hour later we were trading right back at the pre-inventory levels.
In addition to the bearish inventory numbers, the US dollar strengthened against most currencies today. Another interesting anomaly I wrote about on May 4th:
Most compelling from Friday’s trading was the strength in both the US dollar and commodities. Over the past month, the dollar has crushed the YEN and improved significantly against the Euro. But crude oil jumped 3%; natural gas gained nearly 2%; and the precious metals ended higher on the day.
Now…when crude oil, gold and other commodities began their run last summer, many argued this was a result of the ever weakening Dollar. And as equity prices began to falter in the second half of 2008, commodities were then viewed as “flight to quality” investment vehicles. But the stock market and the Dollar have reversed their downtrends, and yet we still see strength in crude oil and natural gas (gold and silver should not be owned). This is an interesting dynamic that suggests one of two things. Either energy prices are (mostly) trading independently of the US dollar, or the supply/demand relationship really is one sided.
It appears energy prices have decoupled from the US dollar. I would also argue that lower US demand for oil is being more than offset by growing demand in China, India, Brazil and the rest of the developing world economies. Notice that Gold and Silver both dropped today. These commodities should not be owned.
It will be interesting to see how far today’s selling extends; we’ve yet to see any type of sustained market pressure in weeks. Specifically, you should monitor the reaction to AIG’s earnings (tomorrow). Despite terrible numbers from C, MER, WFC, FNM and others, financial stocks have been spiking after their reports (though FNM lost most of yesterday’s gains).
This market is still trending higher, but today was a perfect example of why one should never be 100% long (or short). Look to MGM, GRMN and others to balance what you own.
