Wednesday, September 30, 2015

Envestor First Contributor

Hello audience,

Today, I am really excited to announce the addition of my contributions to the site Envestor First, a website dedicated to oil and gas intelligence and research. Their extensive data and in-depth articles are very informative for investors looking at stocks in the energy sector. From here on, most of my posts will be published on that site along with my own profile. As everything is getting updated, feel free to check out the website and my stuff (even though you can read everything there as well). A link to Envestor First will be posted on the right side of the website as well as a link to my profile when it is finished. This expansion is greatly appreciated, and I am ecstatic to have the chance to expand my audience. Check out my latest post on their website at My blog and social media accounts will not change so keep tuning in. In about 3 months, I have about 7,000 pageviews. The growth of my reader's base and my writing will continue with every post.

Thank you again for all the support!

Jacob Hess

Tuesday, September 29, 2015

All of OPEC's Eggs in One Basket

Stocks inch higher after a day of heavy losses hangs on the minds of investors worldwide. U.S. traders react to midday reports of high than expected consumer confidence levels. Up 1.9 points from August, the consumer confidence index reaches highs that haven't been approached since January despite the fact that YTD Dow and S&P movements have been -10.01% and -8.25% respectively. A gossamer sense of confidence comes amidst global worries of economic health where inflation and unemployment levels continue to grapple in an epic macroeconomic struggle. In the same report, the present situation index rose 5.3 points from last month marking an eight-year high with many Americans citing a preference for the current economic situation over the recent past. Perhaps it comes from a relief period following the drastic losses. Nevertheless, the expectations decline did show a decline of 0.6 points from last month, but other than a slightly lower prospect for growth, consumers seem unsure if another recession has descended upon us. But things aren't all that bad for consumers anyway. Gas prices are low and low levels if inflation has kept the price index very low. Nevermind the Fed speak, their dollars are stronger than ever and a painful stock market is just a necessary evil that Wall Street can fix. It's really unclear whether the stock market actually thinks these numbers are very relevant to investing health because, in the end, the fiscal tightening is most relevant to corporate balance sheets. Either way, bearish sentiment is brushed to the side for today. Brent and WTI crude oil both increase 1.92% and 2.03% around the midpoint of the trading session. Although, the crude gains come with very low volume statistics endangering any significance of the move. Feelings around the energy sector seem halfway wedged between the bear market and a reduction in oil output. Equity in energy companies is performing neutrally with the NYSE Arca Oil Index gaining just 0.63% and the S&P Energy Index losing -0.18%. Reflecting the equities slump removed from crude oil gains, ETFs following WTI movement have posted larger gains today with UWTI gaining as much as 5%, UCO up 3%, and OIL increases 1%. These are some of the indicators associated with WTI priced oil which is what most of the articles written here discuss. Today, I'd like to discuss some of the characteristics of the Middle Eastern (and other OPEC) crude oil market. Those following the oil glut might forget the importance of U.S. petroleum prices outside of the country even though the glut has domestic origins. One of the most important things I have forgotten to discuss is the OPEC basket price which I may begin to include in my daily analysis. Its significance is not limited to the Middle Eastern countries but all oil-exporting nations with large reserves and dependence on that natural resource for public funding.

What is the measure of the fundamental balance of supply and demand in OPEC markets? The basket price which features a mixture of crude oil serviced by various member nations. Though primarily Arabic, other countries in South America and North Africa have their crude output priced using this index. This oil is typically described to be heavier and more sour than the blends represented by the WTI and Brent benchmarks. Therefore, the OPEC basket price tends to be cheaper relative to the two sweeter benchmarks. That's not to say nations using this price are shortchanged of revenue. The oil cartel is able to keep prices at a competitive and low rate because of their low break-even points and economies of scale. Extracting oil is almost as easy as digging a hole like the old hyperbole used to say, and that is why the organization has been able to maintain such large amounts of market share. Although, that no longer seems to be the case as fracking has created a new threat to the cheap drilling about which OPEC was able to boast. The top chart shows that OPEC's power was certainly vulnerable to the supply glut that started midway through the second quarter of 2014. Just as WTI did, the OPEC basket price experienced a new low around $40 a barrel by the first month of 2015 after decisions to not manipulate their production. Throughout 2015, their price has experienced a similar rebound and decline that reflects the fundamental balances in WTI and Brent price. The more interesting chart on the bottom presents a ratio analysis of the OPEC basket price over the WTI benchmark price. Movement over the middle 1 shows OPEC gaining more than WTI. Movement below the middle 1 shows WTI gaining more than OPEC. During the initial and largest drop, one can see that OPEC's price faired relatively worse than the U.S. index as it reached almost 85% of WTI midway through January 2015. This seems to be a purposeful drop as OPEC was looking to cleanse some U.S. producers out of the oil market with extremely low prices.Saudi Arabia was especially unwilling to cut production in order to show that its efficiency and low costs were superior. Unfortunately, fracking companies adjusted and fought back with low costs of their own. The subsequent rebound where the basket price outperformed WTI was perhaps an illegitimate bet that the slump would end soon; thus, allowing Saudi Arabia to increase the basket price in order to assuage member nations who were experiencing a dearth of cash in their coffers. It was especially hard on countries like the U.A.E., Nigeria, and Venezuela where the government balance sheet was in dire need of oil revenue to balance out public programs. Relief never came, and the supply glut continued as American corporations kept pumping. Therefore, after a brief period of lateral performance between the two crude benchmarks, the basket price started to drop. This time the problem wasn't supply but a demand scare from OPEC's largest customer, Asian markets (especially China). The third arrow depicts a brutal fall to almost $43 (where it currently stands) after weeks of poor Chinese industrial data. After Chinese growth prospects were reduced, OPEC took a big hit and had no choice but to drop prices if it wanted to sell enough oil to keep up with the market share it wanted to preserve. As Saudi Arabia contemplates its next move and member nations plead for higher prices, Iraq's introduction to the market threatens to neutralize production decreases from the United States. At the same time, regional conflicts threaten Arab states that can't pad conflict with the extra black gold that usually come from higher prices. So what comes next for OPEC? It seems to be clear by now that the cartel's iron grip on market share is loosening with every month. As U.S. firms generate 
higher margins on the more attractive sweet, light crude. Perhaps, that's why production quotas have not been introduced. But even if their plan is to produce as much as they can, new project spending is projected to go down for the next four years, from $120 billion in 2015 to just under $40 billion predicted in 2016. These spending cuts will be vital as the next few months of global weakness will weigh heavily on crude oil demand and the basket price. Going forward, these are the problems that OPEC and the Middle Eastern countries face as economic weakness pervades not only the American economy but the international equities and commodities system which is currently stuck in a bear's nasty grip.

Monday, September 28, 2015

The Purse Strings Tightened

After a weekend of tranquility from the stock trading scene, investors broke the bank on Monday to open another week defined by a monstrous bearish wave of sentiment. Dow futures opened once again predicting a loss with news of an Alcoa split and a giant energy merger to play out during trading hours. The Dow Jones Industrial Average broke into the 15,000's with a low around 15,981 and a close down -1.92% at 16,001. The Global Dow Index sits about -0.32% lower hinting that a lot of the damage was compartmentalized to the U.S. stock market. The S&P 500 fell -2.57% below the 1,900 level where the correction had established a support. The 50-day trend line breaks farther from the long-term 200-day trend as NASDAQ's trend line's finally complete the reversal signal called the "death cross." The technology indicator dragged down by a biotech slump is approaching a break-even performance for the year as its three-month losses amount to -8.36%. Falling with the market were the two crude oil indicators, Brent and WTI which both lost $1.26 and $1.27 which is -2.6% and -2.8% on weak demand outlook. Commodities saw a systemic decrease after the dollar strengthened on a continuation of global economic weakness. With bearish sentiment around crude and equities markets, a lot of energy companies fell today. Some of the biggest losers were Chevron and BP who lost -2.48% and -3.45% respectively. The overall energy sector lost -3.66% today, more than the past five trading sessions which ended at -3.15%. It was the third most losing sector today in a declining market with more than 1 billion in selling volume. If the uncertainty in the past had resulted in lateral movement as investors were waiting for some sign of strength, the uncertainty now has pushed that lateral movement into a more direct downtrend. The VIX volatility indexed increased a whopping 16%. Tightening capital conditions are squeezing the optimism out of the mergers and acquisitions that have been looking for stabilization in the current economic atmosphere. Investors discounted the stock of Energy Transfer Equity LP as it organized one of the largest acquisitions in the energy sector, the purchase of William's Co for $32.6 billion. A sell-off dropped the acquirer's stock almost 13% as the big market move was initiated today. They aren't the first to experience losses as acquirers either. It seems that investors are discouraging large purchases of smaller companies as short-term investment spending like acquisitions are perceived to have a higher risk than more conservative long-term investment expenses. The financial extension of buying and assimilating external assets is frightening investors in a time where they are debt averse. Even though interest rates are still low, the economic squeeze is still weighing in on balance sheets. Furthermore, if inflationary pressures remain very low, companies could see a hefty price tag come back to haunt them as the expansion of money still remains relatively muted. This is especially the case for energy companies looking for a way to assure the efficacy of operations during the price slump. As many break-even points are broached because of low selling prices, many executives might look for economies of scale to reach that point of higher profits. Large cap corporations might perceive the ability to sustain an acquisition with their large capital purses and fashionable credit ratings, but the extra effort needed to incorporate new assets in an already established infrastructure costs that extra dollar low energy prices won't give. Investors are understanding this fundamental crunch and, in turn, looking poorly upon large-scale asset shopping. As I've said before, now is the time to buckle down on capital and dedicate the extras one might find into lowering that break-even point. That is the only way to climb out of a slump that appears so long-term like this one.

A comparison between the Dow Industrial index and the Dow Transportation index is a popular technical litmus test of market health similar to the VIX measure of volatility. A ratio analysis of the to can provide insight on where demand is going and whether an investor should feel more bearish than bullish or vice versa. Here, we see two stories. A greater bullish run from transport stock seems to be outperforming the industrials as of lately, but the past two weeks have been the other way around. We can see a reversal signal around the 24th of September when the MACD crossover point occurs the same time the price falls below the 200-day average. A transportation sector underperforming typically shows a decrease in overall demand as industrial stocks are perceived as more inelastic investments. The down trend in the market today would be supported by this bearish data as falling volume statistics depicts a deflated equity's market. That could be another reason why mergers and acquisitions are discouraged as well. Negative sentiment surrounding stocks, in general, are intensified by the prospects of an expansion of capital expenditures. I would predict further negative sentiment around companies looking to expand in times like these as bond securities gain popularity as perceived risk increases in the equities. Once again, sell-offs are exceptionally prone in the energy sector where low revenues are all but ensured with the price slump. Let's batten the hatches and look forward to third quarter corporate and economic data that will give traders reasons to go long.

Sunday, September 27, 2015

Energy's Biggest Movers: Summit Midstream Partners LP (SMLP)

Today, we are going to look at Friday's biggest mover in the energy sector. Summit Midstream Partners LP is an infrastructure based company that focuses on gathering, treating, and processing natural gas and crude oil. It has a key partnership with Energy Capital Partners which has been significantly hurt by the impending oil slump. As a result, the last three trading sessions have reported two days of extreme losses and a day of retracement. There may or may not be a big future move in this stock's price, but to find out more we should take a look at the chart. The first thing to notice is that a gradual bearish trend turned into a plunge very quickly and with heavy volume. The suddenness looks to be the result of a piece of news affecting sentiment or traders thought the need for a correction. Either way, bearish feelings have been circling like sharks around the price of SMLP even though the RSI indicator didn't show any overbought signals. In the period between the red vertical lines, one can see the bulk of the bearish trend with a 28% loss of price in the month of August. This loss was signaled by a MACD crossover point and increasing volume over that period of time. An interesting thing about the directional movement in August can be seen in the green circles. The stock price develops a bouncing movement defined by three or four days of an incline in selling before a day of more intense buying. This pattern results in three bounces off a black trendline that connects with the major drop in late September. How real is that major correction as one can see it is supported by another MACD crossover, an increase in MACD spread, and ADX gains to support a stronger trend. What may be vindication of a rebound is that fact that investors thought that the correction was unjustified as it reversed on Friday. On the other hand, the bullish day could be the tail end of the volume patterns seen in August. Either way, a support was established on the last day of the decline around $15.15. The indicators are a little confusing when taken all together, and don't provide any illumination into what may come next. Volume and MACD indicators protect the extension of a bearish trend even with the major gain on Friday, but the black trendline touched four times looks to be exhausted. In my opinion, the last day of selling on the 24th was the last push from investors closing their short positions. Bulls should begin to establish long positions as this stock reaches its all time low. At the same time, fundamental strength in this stock is being stretched by a strain on credit markets that has affected the ability of Energy Capital Partners to be a sufficient partnership. In that case, the recovery may be limited to a simple moving average like the blue 7-day trend line shown above. There, the stock might develop either a resistance or support depending on whether it enters into more lateral trading movement (inherently bearish) or a breakthrough leads to a reversal in sentiment with investors pushing towards a shift in larger trends to the 30- or 90-day simple moving averages. Analysts right now have the stock listed as an outperformer with it labeled as "Buy" five times. I'm inclined to think that way as well.

Summary: BUY; bullish bounce up to 7-day average, possibly more

Friday, September 25, 2015

Emerging Markets and Commodities

The week after rate delays, markets continue their sideways movement through the end of Friday. The Dow Jones Industrial Average closes today with a 0.70% gain making the week total a -2.16% loss. Fluctuations today stayed within a range of 260 points similar to previous trading days throughout the week. The S&P 500 showed similarly dampened movements as it lost a small -0.05%  with its weekly change reported being -2.96%. The common volatility indicator VIX grew a little today after Janet Yellen extended her concerns for foreign and domestic growth.On a side note, the health sector bogged down the rest of the market as it saw significant losses after Hillary Clinton's comments concerning prescription price caps. Their -2.59% sector loss was significantly lower than the rest of the advancing industries. The energy sector remained directionless today as crude oil prices gained just below one percent on the New York Mercantile Exchange. A lot of analysts around the economics sphere have launched into calculation mode with a multitude of analysis reports touting the next market moves based on the recent Fed moves. A period like this would see an increase in the amount of projections made as financial news outlets have posted various peaks into the proverbial crystal ball. Meanwhile, lateral movements leave a dearth of excitement on which to be reported. Think of it as a marketwide continuation trend in which investors are contemplating their next moves. I find myself in a similar pickle as muted movements leave little explanation for current market conditions, but lend themselves to clairvoyants looking to guess the next move. For trends, many investors are looking at emerging markets as well as the Fed Chairwoman as she mentioned those fledgling economies in her review of the interest rate decision. Many articles have referenced the MSCI Emerging Markets Index which lost almost thirty points this week.

Emerging Markets Index,

As seen by the graph, declines began in May 2015 after increases earlier in the year when rate increases were projected later this year by the Fed. Countries like Brazil and India are experiencing severe weakening of the currencies on which their economies run. Growth rates are slowing down to levels which reflect an information economy (around 3% or lower). The weakness of those nubile economies is scaring money from where it is needed most. Public spending, instead, is replacing the private capital that used to be heavily bet on explosive growth coming out of the last years of the financial crisis. Some are blaming that on fundamental weakness. Others point the finger at Yellen's lamentations of global economic health where she cited emerging markets as proving unwieldy based on international growth standards. But she isn't completely baseless. Emerging market economies have been stretching their balance sheets creating more risk on their sovereign debt. Weakening exchange rates are hurting their ability to fund important projects especially those supported by U.S. multinational companies. As rates are projected to come later this year, global investors are abandoning risky debt for U.S. treasuries that are sure to be more valuable after an interest rate followthrough. Instability accentuated by bearish stock market trends could create an atmosphere where capital seems scarce (though contrarian analysis would say otherwise). As much as U.S. investors would like to separate themselves from the anxiety in emerging market economies, they can't, especially when we look at where a lot of global demand will come from in the future. 

In the charts above, we have a comparison between the S&P Energy Index and the SPDR MSCI Emerging Markets ETF linked to the index I showed above. They are representative of the U.S. energy sector and emerging market performance respectively, Looking at trends, the two indices seem to follow each other in the same general long-term direction with major gains last year before the oil slump and a general downtrend when it actually occurred. The period I'd like to focus on beyond the blue line seems to be a mirror image. Some might even call EMFT the S&P Energy's doppelganger if they didn't know any labels. Taking away from this chart, investors shouldn't think to correlate these indices directly because there are some deviations; instead, they might want to think what's behind the graph. The truth is that emerging market economies provide a lot of substantial demand for commodities, especially crude oil and other energy products. China, one of the largest emerging markets in the 20th and the 21st century has driven global oil demand growth for years. Demand from India, Brazil, bustling African countries and booming Asian economies will drive the growth that will mitigate the supply glut. On top of that, resource economies attempting to grow their service sectors (typically a telltale sign of economic well-being) will decrease their dependencies on "cash crops" like crude oil, timber, and gold. The first step out of raw material dependence is diversification. With bearish markets in emerging nations, the commodity traders in the United States might see further losses extended on the already dismal performance from the futures exchange. We've already seen commodity prices drop from a strong dollar, but weaker foreign currencies have the same effect on consumption outside of the U.S. nation. By Q3, revenue forecasts for multinational companies could be hurt by these prospects. Going forward into the back end of 2015, investors should stay aware of those growing economies as they can play a big part in commodities and equities markets with the intense amount of capitals needed to maintain high growth rates.

Tuesday, September 22, 2015

Facing the Bear in the Room

The markets came limping into this week after a prognosis informing investors that the monetary crutch loaned to the economy is still needed even 7 years after the financial crisis in 2008. Dow Futures this morning predicted a 200 point loss to the Dow Jones Industrial Average as systemic weakness continues to keep the stock market from approaching levels that created the bubble earlier this year. As Chinese data eases out of traders' worries replaced by an overall state of global melancholy. After a drop of -261.23 (-1.50%), the Dow Jones drops to an 11.4% from the apex of 2015 which was 18351.36 on May 19, 2015. The Global Dow shows the losses have an international scope with a -48.78 loss (-2.10%) trading 14.1% below its high on May 22, 2015. China's market grows almost 1.00% but also remains an astonishing 38.5% lower than its June high of 5,178.19. Why does global data really matter in the end? Another problem that the Fed cites as keeping inflation and growth limited is by a stronger dollar hurting net exports. Worldwide demand for commodities and a lot of optional goods is going to hurt the prospect for revenue growth. For that reason, investors are wary when putting their money into sectors like energy and consumer goods where demand data may have a greater effect than other sectors. Both these sectors and the Basic Materials sector lost the most today with total market declining volume at 837,966,175. With the losses today, total volume increased with the S&P 500 experiencing almost 20% more volume than the quiet trading of yesterday. Shares of Exxon-Mobil were traded almost 11 million times yesterday which was overshadowed by 14 million today, an increase of approximately 27%! Trading activity looks to want to hand down a verdict of weakness to the economy, and the punishment is a sell-off. The market yesterday looked bearish and sad, but today investors sold with confidence (of unconfidence). Many analysts are suspecting a long-term bearish trend to sit in over the markets as more and more money will look for a new home. But why? Are prices inflated? I don't think so, but most people do not care. The correction after the slightest news of a Chinese recession has scared many into backing out of the game that could penalize them suddenly at every second. In both the general market and the energy sector, we've seen billions of dollars lost in a second then suddenly a recuperation. Post-financial crisis traders will especially be timid in putting money in the "betting machine" the stock market has been perceived to be. That is just how things will be for a while. People might want to look at bonds as an alternative, but interest rate delays have given that kind of security a bad rap. Growth might be stemmed more than what the Fed had wanted when they met last week, but I wouldn't rule out the hope of some kind of good news coming from third-quarter earnings reports. In my opinion, the economy is not as slow as we think it may be even though the Fed's decision has framed the way we think about the market as we approach it with our money. There may be a chance for a bounce as another round of economic data is produced later this year after second-quarter GDP data beat the outlook given by the Fed.

Monday, September 21, 2015

The Shrinking Herd

The beginning of a new post-Federal Reserve meeting week was upon us, and stocks responded positively to the absence of interest rate hikes. The Dow Jones Industrial Average grew 0.77% and the S&P 500 showed similar small gains as it grew 0.46%. The VIX volatility index showed a -9.61% drop perhaps showing a reduction in bearish over the rickety markets, but there is no doubt investors have been trading over a down trend. Even with market gains and a major decline in the volatility index, I can't help but feel a grayish overtone fall upon the market. While the S&P 500 showed those gains, the volume level reached a monthly low which is half the amount of last week's close. Trading activity is most likely muted by the fact that the Federal Reserve saw enough of a poor outlook in the economy that they thought interest rate increases would hurt the economy. No one wants to be told they need a handicap for a game to be fair, and that's just what the economy was told. Why is the market trading in a downtrend? The Fed can't project an inflation level of 2% until 2017. Labor markets are just now staggering to acceptable levels. These were the same issues that investors contemplated as they traded into the volatile period before the correction. They traded scared with low volume. Overall Dow levels shouldn't approach its long-term 200-day moving average for a while with bearish sentiment holding any breakouts below that trend line for at least a year. The sector that will be leading the downtrend, energy, might become a barometer for recovery as the Fed goes forward looking to raise rates. The glut continues and prices remain at the lowest they've ever been with no end on the near horizon. Although, a report published by Wood Mackenzie cited that "up to $1.5 trillion worth of oil and natural gas products are in danger due to price slumps." On this report and bets that production declines would continue into the end of the month, WTI crude saw an increase of 4.5% after its plunge on Friday. Brent saw similar gains at 3.1%. Nevertheless, the Federal Reserve's decision still questions demand and growth that typically boosts production annually. For that reason, we'll see a mediocre performance from the S&P Energy Index (+0.57%) and the Dow Jones Global Energy Index (+0.09%) showing the pains that investors feel from demand data. Looking at sectors, that of energy will be slower than 6 other sectors that gained today at a measly 0.32% even with Dow and WTI gains. So what can we expect from oil prices in this post-correction, post-interest rate hold market (because both are still looming over our heads)?

Once again like many times on this blog, we've got WTI's three-month chart showing the end of the summer and beginning of fall data. The shape encaptures the long summer plunge, the stock correction, and the volatility of recent. Now, we are stuck in a period of whipsaws that have made profits hard to maintain and driven volume down. The Relative Strength Index signals a trading environment just like that as supply and demand pressures wind down into a triangle pattern. Typically, triangle continuation patterns stall a trend for a certain amount of time before it resumes as well as marking the halfway mark of the movement. This particular shape appears to be more of a bullish flag with the angle of gains being larger than the losses, but that activity is supported with decreasing volume from the ADX indicator on the bottom. Volume levels reflect the weakness that was shown during the bearish wave in July in which earnings reports and increasing production produced immense pressure on a lowering benchmark. Here, the herd looks pretty weak which reflects the market trend of exhaustion that threatens bullish sentiment. On top of that, the MACD indicator shows a smaller and smaller spread, threatening a key crossover moment that could generate a lot of sell signals. What might be hurt most are the oil ETFs that bet on bull and bear runs in the near future. Look for UWTI, OIL, and UCO to have muted movements as the week goes on. Another important thing to notice is that prices are currently hovering around a 50-day average that looks to define a monthly trend. Breakouts in either direction could mark the creation of important crossover points that signal a trend continuation of a countertrend. A bearish reversal would have to surpass the support line around $43.00 to mean anything. Right now, technical indicators show ambivalence in what way to trade, but supply fundamentals could resolve any confusion. With production declining week-by-week and further projects endangered by a dearth of extra cash, fundamental forces look to be pushing investors to make bullish bets, but they have to be there to make them if they want the price to move. Another lever to keep in the back of your mind is that held by OPEC. Fledgling members are demanding a production cut, but the Saudis haven't given in yet. The hollow end of 2015 will bring about more global emerging market issues on that front still to be resolved on OPEC's international stage.

Thursday, September 17, 2015

Swing Low Sweet Interest Rates

There are a lot of emotions that affect the market during financial events concerning a company or the overall economy. We have seen Q2 earnings reports slam energy stock prices as oil revenue dropped significantly. Weekly, production data from the Energy Information Administration throws support behind bears or bulls depending on a change of 100,000 barrels a day in either direction. Volatility can make the markets scary for investors especially when the effects are so real, but that only magnifies the issue as traders, learning from the past, react to the next event like that crowd did the last time. Ask anyone involved in the oil market, and they'll tell you the masters of this form of financial avarice, OPEC. The oil cartel constantly takes advantage of production quotas and Middle Eastern conflicts to win them higher revenues. The markets so far this week have been acting in the same way (although, the Fed doesn't have skin in the game nor attempts to manipulate prices like OPEC). Adjustments and readjustments have caused further volatility up until today when the FOMC board finally emerged with a verdict. Rate hikes will have to wait until October's meeting. What does that mean for the economy? Yellen commented multiple times in her press conference that the economy needed to strengthen before rates would be successful. While there was a lot of Fed speak surrounding her projections, at the base of the report Yellen showed confident in a labor market that decreased 0.3% points since May but appeared discouraged about the low rates of inflation, also about 0.3%, as a result of low energy prices and a strengthening dollar hurting exports. Projections up to 2017 see inflation under the 2% target rate as crude oil prices will take time to recover as well as a weakening of the USD. As for the labor market, the Fed will hope that the continuation of low-interest rates will continue to eat away at excess unemployment while attempting to heat up monetary growth. In response to the Federal Reserves decision, stocks rallied with the Dow Jones, S&P500, and NASDAQ showing bullish sentiment behind the decision. The gains, though, appeared unsustainable as trading continued as if unmoved rate hikes were expected. The Dow ended down -0.39% after the bump from the Fed report which put the high for today around +1.5%. The financial sector leads the losses today producing the highest percentage decline at -0.65%. Even though the markets finished bearish, there were a total of 1,866 advancing stocks as opposed to 1,201 receding. Most investors would attribute that to a confusing day on Wall Street with positive sentiment from rate holds mixing with negative feelings concerning the economy. Today's trading psychology in the overall market seemed to be reflected in crude oil future's trading. WTI showed lateral movement with a meager -0.19%. On the other hand, the international benchmark dropped a full percentage point, spreading the gap with a reaction to weakened global demand. Both the NYSE Arca Oil Index and the S&P 500 Energy Sector dropped less that -0.10% showing a very neutral day on the market. Crude oil ETFs showed a larger loss perhaps hinting at a bearish wave to come. With the discussion of interest rates continued into the end of the year, I'd like to look back at the reaction of crude oil to interest rate increases in the past. When interest rates are raised, oil investors will be left to decide which way sentiment will take prices, either up, down, or lateral.

Above is the chart showing historical changes of the Federal Funds Rate. I have highlighted four time periods where rate hikes were consistent and made a major change to the macroeconomic environment. They are as follows:

  • 1.25% June 30, 2004 to 5.25% June 29,2006
  • 3.25% February 4, 1994 to 6.00% February 1, 1995
  • 6.50% Late January 1988 to 9.75% February 24, 1989
  • 4.75% November 26, 1976 to 20.00% December 1980
So we know that the macroeconomic trend during these periods was defined by a tightening of the money supply which typically hurts stocks and decrease demand for commodities. If we were in a period with higher inflation, commodities might be affected by a weaker dollar as far as monetary concerns go, but the deflationary environment would be especially susceptible to further dollar strengthening. Interest rate increases would see a continuation of the trend of dollar strength, thus, hurting foreign demand and exports for commodities, especially prospects for crude oil price. Nevertheless, the periods which rates were increased typically had a higher rate of inflation like (but not as extreme as) hyperinflation in the 1970's. Looking at WTI price movement during these periods, we may (or may not) be able to decipher similarities. Due to data limitations, we will focus on 1994-1995 and 2004-2006 charts.

Both of these charts are plotted over the same amount of time (approximately a month) so that we can accurately compare the shape of the graphs which actually show a lot of similarities. Both charts show significant amounts of growth after rates are increased. The increase occurred despite moderate momentum technicals. Both the RSI and MACD indicators sit around the midpoint of their scales which usually denotes a trading segment in the chart's shape. Instead, technicals quickly point to an overbought market which seems to be the reason for a short sell-off after the initial increase. The technical indicators probably operate in this way because the benchmark's traders are responding to the event of rates being raised. Here, in the first six months, we'll see a speculative bubble form from the sentiment surrounding monetary action. Both indicators fall immediately at the sign of excessive buying and continue into a lateral trading segment. In 1996, the lateral movement will hover around the 200-day average, but the 2006 movement shows a slightly more bullish market. Either way, the rate increases both produced initial bullish gains with either a bullish crossover from the two moving averages (1996) or a maintenance of an upward short trend extending beyond the long-term (2006). What comes after is perhaps most important because it shows us that a trend is probably not going to last the full year. As for WTI trends that could crop up during the next interest rate hikes, the first six months will produce a lot of volume back trading (either bullish or bearish) that will seem like a legitimate move. Unless the Federal Reserve waits for inflation to resurface at their target level, my projection would be a bearish trend that tests support levels established in the weeks following the rate increases. But after that, the market will succumb to some lateral movement that will yield to the sentiment surrounding fundamental issues because the 2015 period of crude oil trading is distinctly defined by a supply glut. Numerically, I'd predict $55 to $60 a barrel prices going into a rate hike with a bearish trend dropping prices to $46 to $48. Lateral movement will depend more on fundamentals, but with production cuts already occurring, I could see the WTI benchmark hovering around $60 to $65 going into 2017. If a supply glut continues into the next year, a realistic estimate might be around $55 to $58. It might also be important to monitor the gap between Brent and WTI crude futures as Congress begins to repeal a ban on exports. Obviously, there are many events that we could factor in (such as a last ditch effort to retain market share from OPEC), but including too many variables can fog insight. At the same time, ignoring those possibilities produces a rigid model of normative economics relying on ceterus paribus too much to determine the future. Instead, these ideas can be used as a general guide on how to think about interest rates and crude oil interactions that may be relevant in the future.

Tuesday, September 15, 2015

Interest Rate and Gas Prices

The day inches closer as economists continue to mull over the possibility of the Federal Reserve raising interest rates. Bond traders provide small signals of the sentiment surrounding the decision as they drop the price of the 2-year Treasury security in anticipation of an abstention from increasing interest rates. But an increase is expected in the future with long-term Treasury bonds going up in prices. Commercial economic data came out today, but no data was convincing enough to ensure the future of interest rates. In the same manner, the markets gained today under the same projections of a continuation of low interest rates. This is expected to keep encouraging investment spending and push inflation from its low levels this year. The Dow Jones is up 1.08% with WTI price increasing $0.86 (+1.93%), showing positive movement on both investor sentiment and production cuts. Indices measuring the energy sector show some increases. The NYSE Arca Oil Index (XOI) gained just 0.80% and the S&P Energy Index increased 0.87%. Just as energy stocks were dragging the markets down yesterday, today Chevron and other oil based companies lead gains today. Chevron, listed in the Dow, is one of the highest movers as it continues to represent the consistent fluctuations in energy investing. The volatility, though, is allowing for small profit taking on crude oil ETFs which move with the futures price. UWTI and DWTI have been especially active as they track the movements and react with 3x accelerated returns. A build up of long positions wants to overcome the potential sell-offs that threaten losses, but overall the market seems shaky. The volatility tracker, VIX, drops -5.44% to signal some kind of stabilization of the global markets, but economically, things just don't feel right. Emerging markets continue to feel pressure on their financial systems, especially their currencies which are fighting with a continually strengthening dollar. A large majority of the economic concern lies with emerging market countries like China and Brazil where weakness can stunt an environment used to aggressive growth. China especially discourages potential for rate raises as analysts from the Chinese government predict lower than average growth from the second largest economy in the world. Other weak foreign data could translate into lower demand in the commodities market, endangering the prospects of inflation and increases in corporate profits. Another energy commodity that will have a huge effect on macroeconomic indicators such as inflation is gasoline contract prices. As prices go down, more disposable income is opened up to consumers, but it can put pressure on companies with large stakes in downstream operations.

The first thing to note when looking at a chart for the unleaded gasoline spot price is that the parabolic shape almost mirrors that of crude oil. Refineries actually purchase crude oil contracts from that commodity market which directly links their price. There are some factors that also play into the bigpicture like refinery costs and driving demand, so deviations between the two prices can subtly tell a different story. So far this year though, gasoline prices have been dictated by crude oil movement. The first thing to notice is the parabolic shape that shows the rebound and the drop that followed as a result of the crude oil glut. January marks the lowest point of the year so far, but prices in September could retest that 9 month low. For about two and a half months, gas prices have continued to move under the 30 day average. In fact, the movement rarely deviates from the 7 day average. Even though, the trends in Jan-Feb and July-Aug seem to be significant, they don't appear to be supported by a lot of volume. Firms don't seem to be satisfied with the price, but most are bearish because of the slightly higher volume levels during selling periods. This can also be seen as price levels topped $2, and the bull trend tested the bottom three times before dropping off a cliff. Interestingly enough, prices at the pump stay at levels near the rebound period, and often times consumers question why prices are the way they are. It should not be forgotten that gasoline is typically a product with inelastic demand. This means that consumer demand will rarely change no matter what the price is. For this reason, prices at the pump will not always reflect futures contract prices. As for predictions, gas prices should remain low as volatility mounts behind crude oil price drama. As production is cut and refineries are less full, hedging will create buying pressure in the coming months. Investors should be keen to watch crude oil, natural, and gasoline prices in the future to accurately assess energy sector health for Q3 and Q4.

Monday, September 14, 2015

Supply, Interest Rate Pressures

The drum beat ends this week as Federal Reserve officials finally gather to discuss interest rate increases that seem all but inevitable now. All eyes are now fixated on Janet Yellen and the board of governors as sentiment remains fettered to sell-offs related to the tightening of monetary policy in the world's largest economy. Losses were not only present on the New York Stock Exchange but across the globe in Asian and European markets. As the Dow Jones Industrial Average lost a small -0.38% today, European equities markets followed suit with the Stoxx Euro 50 falling just over half a percentage point. Currently, the Japanese market trades up and China down, both reacting to Asian economic outlook that appears rough. The thought lingers, perhaps rate hikes are not meant to happen. But a Bloomberg article cites the advice of a Federal Reserve man in 2014, don't wait to raise rates, "the situation is never clear, just unclear in another way." Stanley Fischer's comments ring true when you look at investor psychology surrounding just the suggestion of interest rate increases. The longer uncertainty shrouds the macroeconomic policy of the Fed, the longer ambiguity keeps its volatile hold over the markets. If the market is efficient, raise rates and let the most accurate economic barometer inform people on financial health, prices. The Federal Reserve, though wary in removing its hand from the fragile system it has rebuilt since 2008, needs to allow the invisible hand to set things straight for them. As projected economic performance appears to be in peril amidst worries of monetary tightening, crude oil prices are seeing a similar taut environment as demand and supply data jockey each other over investor sentiment.For that reason, directional movement in the futures' price has been muted by bulls and bears splitting volume (down to 292,000 today); consequently, the lateral movements have been rather limp and seem to be waiting for something.

The absence of a fundamental move leaves energy markets to stall as well as crude oil contracts to avoid forming a trend. Economists and analysts can make all the comments and projections they want. Goldman Sachs could projection $10 oil in the coming months, and no one would be convinced they were correct. An aura of consternation will preserve lateral movement until something big happens. I would predict no movements outside Bollinger Bands and maybe even one standard deviation away from the middle until something like interest rate hikes occur. Fundamental changes will be the driver of any price changes as the market goes forward.

The charts above describe the supply side crude oil fundamentals in the United States as stated by the Energy Information Administration. The top shows the tapering off of daily production in the U.S. In a month, energy firms have cut production almost 300,000 barrels per day since the 9.4 million barrel per day production peak at the beginning of August. As cuts approach the 9 million, investors should expect more bullish pressure on prices as weekly data is produced and adjusted throughout the month. Production decreases of 300,000 a month would leave cumulative levels around 8.2 million a day, With seasonality taken into account, demand should level off enough to make the fundamental gap wide enough to be bullish by the new year. Another data entry that is often looked at is crude oil stock count that shows the accumulation of unused petroleum throughout the United States. This statistic may not always be the best to predict prices in the future, but it can be a signal of how crude input levels in refineries to make fuels and other petrol products. The monthly data above show a new peak coming out of the month after a small drop. This could be due to preparation for refinery slowdowns in the fall and winter months as well as the slower driving demand in this period. Overall, rising stocks can provide a thin layer of bearish sentiment. Stalled crude oil that needs storage costs money to transport and be preserved pressuring operating expenses across the energy sector. At the same time, companies will only store oil, investing more in its value, if they see a rise in prices coming. Perhaps, this small blip in stock numbers suggests that there will be better hedging opportunities in the near future. In the end, the EIA and OPEC will be crucial to the continuation and possible conclusion of the supply glut. Investors will continue to keep one eye on this data as it remains a key price mover for futures contracts and energy stock.

Sunday, September 13, 2015

The 2001 Tech Bubble and the 2015 Chinese Bubble

In the last week of August, the investing world experienced a significant correction that saw the exit of large amounts of money from the market. The reason for this event was the development of a speculation based bubble as traders traded on an economy that was weaker than sentiment that surrounded it. The markets could not support this extra girth and dropped it. The cyclicality of the business model begs for economists and long-term investors to give attention to macroeconomic dynamics. Specifically, analyzing the accuracy of the efficient market hypothesis can be the key to creating and exiting positions based on speculative bubbles. Are prices at any point in time accurate depictions of supply and demand fundamentals? Or are price movements the result of the psychological chaos that is investor sentiment? At the beginning of the millennium, the market saw a reevaluation of stock prices that were inflated by the seemingly revolutionary sentiment behind tech stocks. The dot com boom of the early 1990’s building into 2000 and 2001 can be compared to the recent correction the record high Dow Jones that survived a volatile first and second quarter in 2015, but ultimately fell because of a hollow economic recovery signaled by Chinese weakness. Separated by a period of fifteen years, short-term business fluctuations saw two crests and two troughs (2001 and 2008) in this frail era of an increasingly complex financial system. The dot com bubble formed after Greenspan’s Era of Moderation where monetary policy encouraged riskier investing in stocks and eventually tech stocks that seemed to rise forever. Dot com securities reached their peak in March of 2000 where they tumbled in a matter of days. The following year brought recession like symptoms as pensions and other major investment funds had made their move to stocks as they were deemed the safest (just like real estate in 2008).

DJIA 2015

DJIA 2001
Looking at the six month charts, we can see the periods leading up to that Dow Jones crashes as a result of speculative bubbles in 2000-2001 and 2015. Both major drops are over 30% and backed with intense volume data. Another technical similarity is the amount of time drops of over 1000 points took to reach their bottoms, both in less than two weeks. The brevity of the sell-offs spells out how dangerous corrections can be to anyone’s portfolio. Just as the characteristics of the drop are similar, the retracements immediately following the bottom can be compared as well. Retracements that occur this quickly are typically the result of long positions being made as resistance levels are established across the market. These “stable” signs of tapering off volatility inform traders that the correction has found a value acceptable to the fundamental situation. Therefore, it is also important to note the lengths of volatile movement that precede the surety of the drop. Now that we’ve realized a connection between the dot com correction in 2001 and the Chinese correction in 2015, I’d like to observe WTI price movement in order to gain insight on the ambiguities in the energy markets today.

WTI 2015
WTI 2001
It may seem frivolous to look at charts that don’t appear to be related to the technology bubble, but we may be able to make observations about the overall economy’s reaction to the bubble. One similarity can be seen in the short term reaction to the speculative bubble popping. After a week or two of futures trading, a small sell-off can be seen tacked on to movement from before the dip. Before this small period, movement does not lend itself to a comparison. Although a 50-day moving average suggests similar movement, the patterns are actual very different for an obvious reason. Despite the fact that stocks were overvalued in both situations, the 2015 crash was part of an ongoing complication in crude oil supply, a major glut that had sent prices through the floor. WTI downward trends in 2001 may only be a result of demand data that was influenced by the recession following the tech crash. The resulting volatility inspired a sell-off. Crude oil movements in 2014-2015 are supply related with long-term volatility and stable short term directions (except as of September). Another difference may further insight into the relationship between equities and commodities prices. The onset of inflationary or deflationary environments can change how the two securities are correlated. In inflationary settings, commodities and stocks move together reacting to an increase in exports and a strong economy. Deflationary environments cause stocks and commodities to move against each other as they react to currency strength differently. In 2001, investors are going to be trading in an inflationary period so when stocks are dipping so are crude oil futures. The economy we are trading in now is almost deflationary causing a relationship to fizzle. Investors have seen with the stronger dollar, commodities are hurt but stocks are encouraged by the possibility of a stronger economy. In the comparison between the tech stock bubble of 2001 and the recent bubble in 2015, we have been able to tease out some factors that can be identified through the similarities and differences of the two periods. It is apparent that a short term loss in commodities is the result of any speculative bubble popping, but the formation of a stock bubble does not dictate commodity movement (or at least WTI crude oil movement). Instead, attention should be paid to the macroeconomic condition of inflationary and deflationary pressures as well as unique fundamental atmospheres. For now, we can conclude that the effects of the correction on WTI are over, and supply fundamentals as well as deflationary pressures will define the future movement of the most watched energy commodity.

Thursday, September 10, 2015

Movement Comparisons: WTI, DJIA, and S&P Energy

Interest rate hikes are the talk of the town so far this September as the Federal Reserve Board prepares for their meetings on the 16th and the 17th. Many factors have pointed towards the certainty of raising the cost of borrowing money, but Fed leader Janet Yellen has been hesitant to pull the trigger. Even though the labor market has appeared to stabilize with unemployment levels reaching their typical 5%, worries over deflationary pressures threaten the expansion of the U.S. markets and, in turn, global economic health. Despite the fact that the Fed's actions are surrounded with ambiguity, a bull market attempted to post some gains today as the Dow Jones and the S&P 500 showed early gains that were pared down to about half a percentage point of additions. The movement seemed to reflect buyers reacting to the possibility of no rate hikes. As the main indices showed gains during today's trading session, crude oil futures increased as well but in a more convincing manner. Brent jumped $1.48 (+3.35%), and Brent topped $50 with $1.14 (+2.31%) added to its price. Traders reacted to supply data that showed a decline in daily production as a three-month trend has decreased barrels produced a day from 9.4 million to 9.1 million. As a result bulls bought into the domestic benchmark 438,292 times, beating the previous trading session's volume by 60,000. An Accumulation Distribution Line shows the resurgence of a possible bull wave supporting a price rebound. Furthermore, energy companies enjoyed the gains from the Dow and WTI as they showed small gains overall with XOI and XNG both inching up 0.5%.

I thought it might be interesting to look at some data regarding daily price movements between different tickers, specifically WTI, DJIA, and the S&P 500 Energy Index, On the left, I have listed daily price movements for the last eight sessions with gains in green and losses in red. The right side is a graph which maps purely direction, a 1 for a positive move that day and a -1 for a loss. The idea here is that investors place too much on a direction, green or red. The size of the move can affect intensity, but the direction has an effect on the mood of investing tailored to indices that measure market or industry health. Here, the DJIA measures overall market health. A Dow gain, with all else equal, will convince traders that buying is the trend that should be followed that day. Herd mentality plays a large role in this, and if wide enough, can cause speculative bubbles to form under prices. In the same way, a gain seen in the price of WTI sweet crude oil will cause energy prices to increase and create an impetus for buying. Sometimes all it takes is a 0.50% gain in crude oil prices for the energy sector to reap the benefits of crowd behavior. The chart above supports this. On days that the DJIA and WTI both moved in the same direction, energy stocks (related to energy prices and overall economic health) followed them. Two days (August 31 and Sept 8) presented a scenario where the Dow and WTI moved in different directions. For each of these situations, the energy index moved with the fluctuation that was relatively stronger, so when the DJIA increased more percentage points on Sept. 8, S&P Energy went with it as WTI lost a measly $0.09. What kind of lesson can we draw from these observations? The initial opening directional movement has a particular psychological advantage as an indicator of intraday performance due to its ability to clearly define a bull and a bear zone. The trend mentioned will not always be prevalent, but it's worth noting the dangers of herd mentality. Is it a way to beat the system? A signal that profits can be made from the spreading of bullish behavior? Perhaps, but most importantly, it reminds investors that the markets remain joined by financial intricacies that complicate the analysis of an investment. Right now, it seems that stock growth and crude oil growth are linked as Dow increases signal stronger demand which has been absent in the realm of energy stocks and needed to release downward pressure on prices. Conversely, the increase in crude oil futures contracts will benefit stocks in that inflation will be allowed to rise higher to a stable 2% desired by the Fed. Energy companies are securities that will benefit from the positive movement of both energy prices and the Dow index; therefore, they have the best chance for accelerated growth (and accelerated loss) in the next 3 months. These are general trends that can be used to inform one's investing plan in the short term as these technicalities can vary depending on the financial environment. I encourage further research of this trend and the identification of others using directional movement as intermarket analysis can be some of the most valuable to an avid trader.

Tuesday, September 8, 2015

Quiet Day for a Day Trader

Coming out of labor day, the U.S. markets respond to global market activity on Monday that resulted in lower crude prices and a slight stabilization of European and Asian stocks. The weekend was lead by a jobs report on Friday that was lower than the estimate, but sufficient enough to drop unemployment 0.1%. In the second economic quarter, 170,000 jobs were added just 50,000 lower that the estimate at 220,000. What does that mean for the stock market? The labor market continues to reach for the optimal unemployment level of 5% with the possibility of rate hikes on the horizon. Investors seem fixated on the macroeconomic outlook of events like the Chinese recession and Federal Reserve interest rate increases. Overall sentiment surrounding global economic health is affecting stocks through volatile intraday swings seen through the major indices. The energy sector specifically has seen a lot of intraday and intraweek swings as its traders are forced to react to normal economic data beside low oil prices. Today, the forces appear to cancel each other out as the S&P 500 Energy Index gains just 0.7% in response to a 1.71% increase from the DJIA and a -1.69% loss from the WTI benchmark. The international Brent crude oil benchmark showed gains today rebounding from poor Chinese data presented the last week. Projections in future spending (government and corporate) bolster hopes that demand data has not really been endangered all that much. Nevertheless, volatility threatens the buying power behind recents gains in the crude futures market as well as energy companies across the globe. A closer look at the volume levels behind Exxon-Mobile and Chevron reveal a trend of volume decline of almost 50% over the past five trading sessions. XOM dropped from 24 million to just over 7 million, and CVX declined from 17 million to just under 7 million. Investors simply are not confidence in the finances behind the companies to establish a long position. Chances for growth are stemmed by the higher cost of borrowing money and revenue shorted by low energy prices. At the same time, gamblers on the movement of crude oil prices are trading bear as well as OIL, UCO, and UWTI all trade lower or remain unchanged with fundamentals staying the same. Overall, the market today was very quiet with no sectors trading over 2% silently waiting for the Fed to report their verdict. Stocks will continue to move under the macroeconomic scope as doubts over global growth are either quelled or fomented for the rest of the year. Those fears will be abandoned for the third quarter earnings reports later this year where the Fed and the stock market will make huge decisions on whether 2016 outlook looks bullish or bearish.

Stay tuned and trade the long-term trend.

Thursday, September 3, 2015

A Deep Breath and a Step Back: Economic Overview

Money is green, and so is the stock market today as investors with long positions are raking in profits from global rebounds today. Of the many green price trends, both WTI and Brent benchmarks gain today as they approach the $50 and $55 price level respectively. Both the overall stock market gains and the crude increases have pushed the energy sector today to a 2.13% increase. Energy ETFs also swing in favor of the bull today as long positions add to the buying activity that has the markets looking forward today. Current price trends seem so take in account the encouragement by European central banks that stimulus programs are still relevant to policy makers. A particular report came out of the European Central Bank from Mario Draghi which lent to positive movement on the day. As a new month graces the financial markets, ideas about the economy have changed dramatically. We began 2015 with a very volatile market that was responding to major energy slump that began in 2014. For most of the world's economies, petroleum or other energy-related exports are a major source of capital and support the funding needed for social programs and public spending. At the same time, first-world economies like the United States and most of Europe rely on petroleum to fuel vehicles, planes, and factories, without it economic slowdown would be immediate and systemic. The dive in oil prices put a lot of pressure on these balances. Would the shock to the coffers of emerging economies that still rely on petroleum for a majority of their revenue be too much? Or would the price drop enough for worldwide consumption to explode and stimulate extra growth? And for awhile, consumers in the United States, the main stage of the glut, held thicker wallets and spent a few dollars more. So why do we find ourselves looking at central banks for assistance when a year ago, a major energy source cost over 50% more than it did today? It is really hard to say, and many economists since the 2008 crisis are seriously considering long-term growth and where the global economies can go from there. The Federal Reserve has cited issues with low levels of inflation that are being hurt by pressures from low crude oil prices. With respect with monetary policy, consistent low levels of inflation translate into stable growth as unemployment is combatted with the increase in money generation. Low, stable inflation means business investment and more consumer spending. After the 2008 crisis and the subsequent recession lasting through the 2010's, the Federal Reserve has kept interest rates low to allow spending to increase and, in turn, stimulate inflationary pressures in exchange for more employment. With the U.S. pressures mounting, global confidence faltered as the North American country still remains a cornerstone of the financial system. Suddenly, the development of fracking in the petroleum industry has one of the largest oil importers pushing the price down with a supply glut threatening OPEC market share. With energy prices dropping, GDP is in danger of expanding with 2% inflation (suggested by the Fed), and labor markets threaten to rescind from recent growth.

The chart above plots gross domestic product, durable goods, and fixed investment over the past two and a half years. Gross domestic product peaked around Q2 in 2014 at 4.6% but decreased the next three-quarters to 0.6% at the beginning of 2015. These were the periods most affected by low crude oil prices as the slump hurt energy company's projected revenue as well as labor in that sector. Firms deep in the red were shedding jobs to maintain growth as prices dipped into the $50's. Showing this revenue decline is the yellow line which depicts durable goods decline from 13.9% in 2014 Q2 to 2.0% in Q1 2015. Because deflationary pressures left energy firms strapped for cash and the labor market struggling to growth, fixed investment levels dropped from its peak at 7.5% to 3.3% this year as well. What does all this mean? Low crude oil prices contributed to a deflated economy that was already hurting from struggling employment numbers and sluggish wage increases. While this continued, the stock market traded at record levels at the beginning of 2015 as it constantly produced movements from highs to lows and back to even higher highs. Investors could detect something unsettling behind the volatility, and the Federal Reserve echoed this insecurity in its reluctance to increase the federal fund rate. Petroleum prices rebounded to help improve 2015 Q2 economic data, but it wasn't enough to justify the speculative bubble that sat on top of the U.S. stock market. The correction did not come because of the devaluation of the yuan or the crash of the Chinese stock market. Those factors played a role in getting the ball rolling, but there were deeper problems in the U.S. financial sphere. Stocks crashed because investors realized they had been betting on value that wasn't really there. The absence of inflation decreased exports and caused the record a stock prices to be too high compared to the firms they represented. This was especially the case in the energy sector, but prevalent across the market. Globalization forced Chinese and U.S. stock trends on European and other Asian markets, but that is all. There won't be much of a recession in normal economic life because those figures weren't speculated. This stock market crash was, instead, a correction that reestablished confidence in value and solid investments. Increasing economic data in Q2 as well as rising crude oil prices will help inflation to rise and, therefore, GDP to grow. The Fed and investors will be looking at payroll data as well as more economic indicators to justify a bull market, and their newfound confidence to increase volume. How will crude oil price affect the economy in the near future (last two 2015 quarters)? Increases or a stable price around $50 should provide enough pressures to maintain a 1.5-2.0% rate of inflation. Decreases, which are expected as the glut still remains large, could cause the job market to limit its growth while keeping interest rate hikes undesirable for the rest of 2015. For now, the lifting of restrictions on exports should create a bullish pull on WTI price as well as its competition with the Brent benchmark. On top of that, OPEC production cuts will be important to monitor for crude oil price projections as well as the health of the global economy.

Wednesday, September 2, 2015

WTI's Volatility and Speculative Bubbles

Wednesday's markets seemed to switch roles that have been playing out in the past week. Global stocks have found a way to stabilize, taking Chinese economic data in stride as investors continue to have confidence in their money. The Dow Jones Industrial Average settles at 0.40% with buying and selling pressures canceling out. Volume levels have slowed down to half of what the crash had brought along. Crude oil contracts have, instead, taken on the volatility that the equity markets experienced just over a week ago. Today, WTI October 2015 contracts opened at $44.26 with an intraday range of $3.56 before closing at $46.05. Commodities traders speculating heavily on fundamental implications caused major spikes in price movement with no clear direction. Brent saw similar movements and showed its fourth gain out of five sessions like its WTI counterpart. Whipsaw movement is not typically healthy, but after long summer losses, traders seem hopeful as streaks of bullish sentiment peak out from the losses. Some of this activity seems justified, though, as the Energy Information Administration continues to produce information that reflects inaccuracies in supply data as well as insecurity in equilibrium prices. As a result, speculation has created bubbles in the daily and weekly prices. We'll look at WTI to see examples.

Here we have the past five trading sessions plotted with significant price movements fitted with a bubble that approximates length of time and range in price. The bottom of the bubbles starts on the price that acts as the high or the low for the new price movement. As the bubble begins climbing, its vertical diameter increases with the constant widening of the horizontal diameter. With the leveling of the move, either a circle or an oval will emerge to define the long-term or short-term movement that tells the technical story through the values of the diameters. Near the end of August, WTI showed impressive price trends on the 28th and the 31st which grew to fit a sizable bubble beneath it. Even though a bubble is placed in the space below, the jump is not a speculative bubble. If the trend fails to wrap back around the circle, it's a legitimate trend. The idea is that speculation fabricates value where there is none so a full or major retracement. Small or no retracements will follow a serious move. In the red zone, price movements today produced small speculative movements with entire retracements in the opposite direction. Typically, one speculation bubble signals volatility in a trading session. Two bubbles might signal traders that their money isn't safe there. Speculation bubbles can tell an investor if there is value in a security and if movements are meaningful. Counting the number and amount of speculative bubbles versus solid bubbles (ones with meaningful price trends) can tell a trader if volume has been value-based or supported by sentiment. Further development of this idea will be discussed in later posts. Volatility can be dangerous to any investment, but tracking significant price trends is crucial for profit-making.

Energy Sector Turns Volatile

Just as lateral movement started to pick up, the markets fall again. Upon opening, the Dow Jones Industrial Average dropped 400 points. Weak Chinese data sends tremors through the system once again as Dow futures and the Shanghai Composite traded down earlier. A second correction seems to be occurring today as traders recover from last week's bout with volatility, but that bout is apparently far from over. Disappointing Chinese factory data disrupted crude oil's rebound as well, reversing a three-day trend of gaining 27% to a loss of 7% in one day. On the quieter side, natural gas contracts show less volatility as its monthly contracts show no movements over a penny. This stability could be due to its reactions being heavily governed by domestic demand data as opposed to international. Nevertheless, the natural gas index loses today because of their associations with the crude oil market. The energy sector as a whole seems to have accelerated losses because of the WTI drop that extends drops in that industry initially caused by market volatility. The S&P500 Volatility Index (VIX) increased $4.85 (+17.06%) as investors continue their fret over the volatility levels of the current markets. Further losses could push the market indicator for volatility to $40 levels where they were last week. The S&P 500 Energy Index lost $17.40 (-3.56%) which surpassed the dips posted by the entire S&P 500 Index, $58.33 (-2.96%). Using ratio analysis, we can see that this trend is not odd.

The chart above is a 6-month chart of the S&P 500 Energy companies against the normal S&P 500 Index. The first thing to note is the significance of the underperformance during the summer months.The consistent drop was due to the poor performance of crude oil future's price under the downward pressure of fundamental data. Index activity shifts into a new period of movement at the beginning of August where a month of drops is reversed in a week. The transition period into September has price levels revisiting the Bollinger average after bouncing off the bottom. A slight resemblance to a declining triangle formation hints that bullish pressure is faltering in the face of resuming bearish sentiment. If a bear outlook is adopted, the two similar peaks would be considered new highs and crucial resistance points even though they look to close down on the 50-day moving average. For now, it looks as if sector performance will move laterally with significant pressures from volatility. Investors looking at cheap oil and gas stocks, buying on a downtrend is crucial, and breakouts above that Bollinger ceiling or 50-day moving average are movements into bull trends.