Supply and demand issues drive oil price to a 5 ½ year low and the equity markets fell with it.

Introduction

There is no other way to say it but that oil prices crashed today. Price slid to a new 5 year low, nearly 5% below the previous close, and brought the world down with it. Asian markets did not feel the full force of the drop and were able to hold near break even in most cases but European indices were not so lucky. Early losses there were multiplied later in the trading day as oil prices hit new low after new low.

Futures trading here at home was negative from the earliest, indicating an open just below last week's close. The trade declined a little as the morning wore on and was not helped by positive auto sales data released by the industry. All showed an increase in December sales, most beat expectations and some did it smartly.

Market Statistics

Trading began as expected once the opening bell sounded, a little to the downside. Once open the market quickly moved lower, the first hour of trading saw them march steadily lower by an average of 1% but the carnage did not stop there. Around 10AM the selling began to diminish although the indices continued to drift lower into the lunch hour. By 12:15 the market was down an average 1.5%, led by a 2% drop in the Dow Transports.

Selling pressure persisted all day, lows were hit just after lunch, around 1:30PM, and were then tested throughout the afternoon. The NASDAQ Composite suffered the least losses of the morning and maintained that strength into the close but that is not saying much. There was a little late day value-buying just before the closing bell that helped to lift the indices. They closed off of their lowest levels but only just.

Economic Calendar

The Economy

There was not much economic data released today although there is quite a bit due out this week and next week. Auto Sales was the only official data of the day and released in a trickle as one company after another gave up the data. GM and Ford gave us a hint of what to expect before the bell with their individual reports. GM sales rose by 19.3% in December, roughly 50% above expectations. Ford sales rose only 1.2%, less than half of the expectations but a December record dating back to 2005. Fiat-Chrysler also posted double digit gains, besting GM with a 20% increase. This is good news for GM in particular and the industry in general as it continues the uptrend in car sales we have seen since the end of the financial crisis.

Moody's Survey of Business Confidence fell this week. The index fell by 2.4 points from an all time high set last week. Mr. Zandi takes note of this in his summary and mentions low participation due to the holiday as a factor in the reading. He goes on to say that US businesses remain upbeat and in line with an expanding economy. Hiring, sales and business spending remain strong along with expectations for next year. The bit about "...credit availability improving notably..." is still there and a positive sign for prospects in the first part of 2015.

Later this week economic action heats up. On the labor front look for ADP on Wednesday with Challenger and jobless claims Thursday followed by NFP and unemployment data on Friday. Also on tap this week are ISM, Factory Orders, Consumer Credit, Wholesale Inventories and the FOMC Minutes. The minutes are scheduled for Wednesday and are the lead-in to a month of big central bank action. This week is the FOMC minutes from the last meeting, next week they release the Beige Book outlook on the economy, the following week are policy meetings from both the ECB and BOJ, and then the next week is the January meeting of the FOMC.

The Oil Index

Oil hit new lows today. High supply/production capability and lackluster demand have sent WTI and Brent to 5 ½ year lows, much lower than I thought they could or would go. Today's oil trade started with a small drop from the previous close, and then a steady move that took it lower and lower throughout the day. WTI fell near to 5% while Brent fell closer to 6%. Until there is some sign that production levels are falling and/or that supply is coming back in line with demand or that demand is rising the bear market could continue.

The Oil Index fell today, dropping over 4.5% in today's action to move back below resistance at 1335. Today's price action confirms the down trend in the index and is supported by a bearish crossover in the stochastic. Momentum has yet to confirm but is rapidly in decline. Current target is now about 75 below the current level, near 1,212 and the previous low. This level is the full retracement of the current down trend in the oil sector and is a likely target for bottoming or continuation signals.


The Gold Miners

Gold prices got a lift today, although dollar strength kept those gains to levels sub $1200 until late in the afternoon. Stock selling led to some flight into gold which had already been trading higher on physical buying. There is some evidence that physical buying is on the rise in countries like China and India, among others, which is adding support to prices on top of interest rate speculation. While it looks more and more like the bottom for gold is in, there is still a lot of data due out this week which could impact outlook as well as multiple central bank meetings on the horizon. Look for gold to meet resistance near $1215-$1220 should the move above $1200 hold.

The Gold Miners ETF also traded to the upside. The ETF moved 2.6% higher in today's session and continues to exhibit bullish signs. The indicators are both moving higher in the near term and confirm support longer term between $17-$17.50. Current targets are to the upside, just above $20 and the top of two month range. The sector appears to be bottoming as well, but is by no means confirmed without at least a move above $20 . Economic data, central bank action and interest rate outlook could continue to cause volatility in the near term.


In The News, Story Stocks and Earnings

Earnings season is upon us once again. Alcoa is scheduled to report next Monday kicking off another round of reporting. According to FactSet expectations for Q4 earnings remain low, led by negative revisions in the energy sector. The current expected average growth rate for the S&P 500 remains at 2.6%, down from 8.4% at the beginning of the quarter. Telecoms are expected to lead, and energy is expected to lag which was evidenced by some negative ratings issued today. So far, 87 or 17.4% of S&P 500 companies have issued negative guidance.

Alcoa lost over 5% today in a move that took the stock down to an area of potential support. Today's move created a long black candle that halted near the $15 support line and just above additional support along the short term moving average. Support is along the $15 line, and below that along the rising trend line anchored to the last two lows. This stock could continue to test support into next Monday and beyond, depending on how the market likes the earning report.


The banks will be in focus next week as well. The big banks begin to report next Wednesday with JP Morgan and Wells Fargo with Bank Of America, CitiGroup and American Express the next day. Not to mention the dozens of regional and other financials that will be reporting as well. As a group the financials have been improving over the past several quarters are expected to produce average earnings growth of 5% this quarter. Despite expectation for growth above the estimated average the financial sector was one of today's hardest hit. Supply and demand issues drive oil price to a 5 ½ year low and the equity markets fell with it.

The Banking Index fell nearly 3%, creating a long black candle and breaking below potential support at $72.50 with next target near $71.00. The index has been ranging over the last 12 months and is now pulling back after testing the top of that range. The indicators are in line with range bound trading and potential support between $70 and $71, with some bias to the upside. I say this because the index moved up to the high end of the range after the October correction and made a new 12 month high a few days ago. Earnings will be the tell and could surprise us, the average earnings for the S&P tend to run higher than the preseason estimate and is now so low as to be an easy beat. Plus, positive economic tail winds could boost earnings in this sector.


Micron Technologies is expected to report tomorrow. The chip maker has been on a roll since bouncing back from losing its CEO a few years back. One area it is making big headway with is its NAND chips for smart phones and other mobile devices. The company has reported growth in the past, in NAND and other areas, and could do so again if expectations are met. The stock has been trending up over the past 12 months and is trading just below a 12 year high now. Today shares lost 2.8% in a move that broke below the short term moving average and is approaching a potential support line near $32.50.


The Semi-Conductor Index has also been trending up this year, and also traded to the down side today. The index lost 1.92% today, not the biggest decline but not the least either. The index broke through the short term 30 day moving average with bearish indicators. Although trending up, price action over the past 30-40 trading days could just as easily be a double top as some other more bullish indication. Current support target is just below the current level near 660.


The Indices

The bulls slipped in some oil today and didn't get back up. Today's +5% drop in oil seemed to be the only thing in focus, that and its impact on earnings outlook. The declines was led by the Dow Jones Transportation Average which lost 2.66%. Today's action created the longest black since last January when it also tested support. The index is now below the short term moving average and moving lower, with the bottom of the two month range near 8,750, as a first target. The indicators are mildly bearish at this time and in line with a range bound market. Support at 8,850 has been tested once before and proved strong so could do so again.


The Dow Jones Industrial Average was runner up in terms of loss today. The blue chips fell 1.86%, dropping below the short term 30 day moving average and coming to rest a hair above 17,500. Today's action extends the retreat from the recent all-time high set just two weeks ago, before the end of the year. The indicators are bearish in the near term and pointing lower, but weakly, with next target for potential support about 400 points lower. Looking back over the past 12 months the indicators are still consistent with the long term bull market and support along these levels. It looks like time to wait for support to step back in, which could be this week as data is released.


The S&P 500 is next in line with a loss of 1.83%. The broad market lost over 37 points today and created the longest black candle since early October of last year. Today's action came to rest firmly on the 2020 support line that dates back to the all time high set in September. This line was just barely brushed against, before buyers stepped in to bid prices up but only by a few points. The indicators are bearish in the near term, pointing to a further test of support, but still consistent with rising support in the long term. If 2020 doesn't hold the long term trend line is just below around the 2,000 level, a level which has produced 7 bounces and 500 points of movement over the last 18 months.


The NASDAQ composiste brings up the rear today with a loss of only 1.57%. The tech heavy index fell nearly 75 points today, dropping beneath the short term moving average but not quite enough to meet support targets. The index is about 50 points above potentials support along the 4,600 line. If this line does not hold the long term trend line is just below that and is the next best target. The indicators are mildly bearish and inline with a test of support within a greater uptrend.


The indices fell today but from what? Low oil prices? Low oil is hurting the oil sector, and that pain is being felt by the general market, but once the sting is over what will be left? Low energy prices for everybody else; an environment that I see as helpful to the overall economic recovery. The long term economic trends are up and the expectations for next year are good so I don't see a market reversal right now. Present conditions may be a little weak but that is to be expected at the end of the holiday season.

There is a lot of data due out this week, and next week, compounded by FOMC minutes and the Beige Book. Each piece could be the catalyst to send the market moving but so long as the overall picture remains unchanged, the picture of slow steady growth with underlying momentum, the movement should be in line with long term trends. Tomorrow there will be a few earnings reports, a little bit of data and most likely some big headlines around oil price but the more important catalysts I think will be the FOMC minutes and then the NFP/Unemployment. I remain bullish and am patiently awaiting to buy on this dip.

Until then, remember the trend!

Thomas Hughes