Wednesday, December 17, 2014

The markets are like a Rube Goldberg machine

Yes, the markets are not reacting well to falling oil prices, but it's important to note that they are only off about 4% from the record highs they were setting 10 days ago.

So, the question everyone (even my kid in the car this morning) is asking - why?

We know that gas falling $0.75-$1.00/gallon is putting more money in the hands of consumers.  Admittedly, it is a small sum, but it's better than nothing.  However, as the picture above represents the global financial system is incredibly complicated and very interwoven.

* Russia's collapsing Ruble is having major implications around the globe and banks with large exposure are starting to shake just a bit.

* A number of global economic indicators that I follow are flashing "worst since 2008".  Well, we all remember what happened right after that, right (Lehman/Bear Sterns and the Great Recession).

* At this point, I'm most concerned about several European banks being the catalyst for something significant.

* I've said it a hundred times, but it's worth repeating - technical analysis of charts is equivalent to horoscope reading in my book, but the computers don't care.  High frequency trading dominates the market now (see yesterday's wild swings) and we are only about 1% above major support for all of the US markets.  IF (and it's a big if), we break through those levels the downside is probably another 5-10% very quickly.  However, markets historically struggle to move much in December as people are locking in gains/losses for the year.  I think I could predict the way this market might have moved in 2003, but the rise of electronic trading makes the end of this month a wild card.

Despite all of the talk of "Record highs for stocks" did you know that as of today the Dow is up 3% for the year (Nasdaq is up a more respectable 9% and the S&P is up 5%)?

Since stocks have fallen 5% in the past 10 days, I think it's worth watching the action over the next few days because a major pullback could lead to more selling as managers try to hold onto a positive performance for 2014.

Things to have on your radar this week - Russia, Venezuela, FOMC meeting, the FedEx earnings (they missed despite lower fuel costs - sign of a slowing economy?).  At this moment (Wed morning) - oil is down again and Europe is off close to 1%, but US stocks are looking up a bit on the back of a strong dollar.  We'll see if it holds today.


UPDATE: The markets showed early gains thanks to stabilization of oil prices which led to massive rallies in Oil stocks and frankly, anything remotely tied to the energy industry.

This oil/gas rally was further "ignited" by the Fed's comments at 2pm.  The ironic thing is that by the end of the day oil was back where it started but by that point the stocks had created their own momentum and the program trades ignored the catalysts and focused on the event.  Net/net stocks jump the most in almost 2 years and no one knows why.  The Fed went out of their way to tell us that they weren't really saying anything new, but the program trading pools can't interpret nuance.  When "Janet Yellen says....." hits the bloomberg terminals the computers just buy 'em all.

We are now back above those technical levels I mentioned earlier in the day so let's see if this is a one day wonder of if it has some staying power.  For most of the last two months the cycle has been:

* US stocks are up because X, Y or Z.

* Asian stocks are up because US stocks are up.

* European stocks are up because Asian stocks are up.

* US stocks open up because European stocks are up.....

You get the idea......

Cheers pt2!

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