A sharp drop in crude prices is going to weigh on the markets this week and this could be the final straw. That is the straw that breaks the market's back. The Doha deal is dead. The OPEC producers could not agree on a production freeze and the Saudi Arabian crown prince said "We will be selling at every opportunity."
Crude oil opened down on Sunday night to the high $37 range and well under the $40.50 close from Friday. S&P futures opened down -12.50 but failed to continue the drop in early trading. Crude prices are reacting to the expected additions to the current glut. Multiple OPEC nations are planning on raising production in 2016/2017 and after the heated discussions in Doha that production will probably appear sooner rather than later. There may be a race to sell extra barrels to capture the current high prices before they drift back to $30.
With current month futures expiring at the close on Wednesday the next two days of oil trading could be very volatile. Anyone short or long has only two days to close those positions. The price will go in the direction of the most volume. Since quite a few traders expected Doha to be a disaster I would think many traders were short. However, there were enough longs to push the price to $42 as recently as Wednesday so maybe there were more longs than shorts. With oil down sharply Sunday night, there are plenty of new traders shorting the news.
The drop in the futures to 2,065 suggests the S&P could drop back into its congestion/consolidation range from the prior four weeks from 2030-2065. That takes the S&P out of the current resistance band and gives the bears a chance to reload their shorts if the market opens weak.
Monday is going to be a pivotal day. If we simply dip at the open and rebound back to resistance, I would say the bulls have the edge and we are going higher. If we close at the lows of the day then I would look for a retest of 2,040 and possibly 2,020.
The Dow futures are down -80 primarily because of the expected impact from Chevron and Exxon. The Dow could fall back to the beginning of its resistance at 17,750 and support at 17500-17585. That would be a good place to wait out the first week of earnings. Fourteen Dow components report earnings this week. Those reporting are IBM, GS, INTC, JNJ, AXP, KO, MSFT, TRV, VZ, V, CAT, MCD, UNH and GE. The challenge is likely to come from IBM, Intel and Microsoft. If enterprise spending is really slowing, those companies could post weak earnings and/or weak guidance, which could sour the market.
The Russell 2000 futures are only down -6 and the Russell was the strongest index last week along with the Smallcap S&P-600 andMidcap S&P-400. The surprising strength in the lower end of the market could be a sign there is more buying ahead. This is a sentiment index for fund managers.
Depending on the headlines that follow the Doha meeting this week we could see crude prices dip to the 100-day at $35.53 or even lower if Saudi Arabia starts attacking Iran verbally and promising to fight for market share.
The Sunday headlines were relatively tame but every official will have a microphone in their face all week wherever they go. There may have been a gag order implemented to keep emotional outbursts from making oil prices worse. There will undoubtedly be an effort by some producers to put a positive spin on the decision in hopes of providing price support.
The economic calendar for next week is full of housing reports. The Fed speakers have to clam up after Tuesday because they are entering the quiet period ahead of the FOMC meeting the following week. The Philly Fed Manufacturing Survey on Thursday will be the most important report.
Netflix, one of our positions, reports earnings on Monday. That should set the tone for Nasdaq stocks. However, IBM, also a tech stock, reports after the bell and it could be ugly if the enterprise demand is actually slowing. There has been a lot of talk about companies beating the very low estimates with a "less bad" report and sparking a big earnings rally. While I would love to see it, I am definitely not counting on it.
I did not add any new stocks to the watch list again this week. I would rather wait for a buying opportunity than continually buy the "top" of this rally. If we got a 100 point decline on the S&P there would be a lot of opportunities.
The S&P futures are down -11 points as I type this so unless there is a rebound overnight we should open lower on Monday. There is a lot of darkness before the dawn so anything is always possible.
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