pebblewriter

Tag: oil

  • Crude Carnage

    May WTI futures are off almost 35% since Friday’s close.  This drops it below the 17.12 target we first identified in March 2019 when, at 59.32, CL had completed a rising wedge and tagged multiple channel lines.

    Members might recall the 17.12 target was originally set for April 2023 in keeping with a March 2019 cycle study [see: Macro Factor Cycles and Regime Shifts.] The chart patterns and Fib levels fit nicely with the concept of a recurring 2600-day cycle for significant lows.We’ve reiterated the 17.12 target many times, including last December as CL finished on a high note after plunging 45% in the wake of Jamal Khashoggi’s Oct 2018 murder (when the US achieved maximum leverage over the Saudis – see: Coincidences and Consequences.) The last significant bounce accommodated both the Aramco IPO and the year-end equity ramp.

    Oil has been a favorite tool of not only the Saudis but also central bankers and politicians.  In fact, understanding the relationship between oil/gas and inflation, interest rates and equity valuations has made it possible to accurately forecast most of its major moves over the years.

    At times, this has meant ignoring the frequently misleading supply/demand data, OPEC deliberations, and presidential tweets and focusing instead on where central bankers needed oil/gas to go in order to achieve a particular inflation and interest rate goals.

    As interest rates rose over the past few years, for instance, it became obvious that inflation would need to moderate to relieve the building budgetary pressure.

    One major theme on which we’ve focused since calling the top on interest rates in October 2018 [see: Suddenly Interest Rates Matter] has been the relationship between CPI and the YoY delta in gas prices. By “managing” the price of RBOB, CPI and, thus, interest rates could be managed higher or lower as needed.This was a very reliable theme for most of 2018, 2019, and early 2020 – when the focus shifted to oil’s strong correlation to stock prices.

    Oil has long been a major factor in triggering algos to bid up stocks. So, when oil’s major channel from 2016 broke down in February, we knew stocks were in deep trouble.

    With CL dropping through its 2001 lows and approaching its 1998 lows, what might we expect from oil and what are the implications for stocks? As we discussed last week:

    A drop through 19.27 would be reason enough to revert to short with 17.12 and 10.65 the only support between here and zero.

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  • Update on Gold: Apr 8, 2020

    In our last formal update on gold in January [see: Jan 2 Update on Gold] with GC trading at 1529, I noted that although DXY had held up well, gold should benefit from loose Fed policy – but could see a backtest of its SMA200 based on the oil/gas meltdown we expected.

    I am partial, though, to the Fed putting the damper on inflation in January (reported in Feb) and setting up a backtest of the SMA200 or even the neckline which would set up another leg up to 1710-1735 in Oct 2021 or Jan 2022. Note that this would tie in nicely with the idea of an oil/gas meltdown in 2023.

    We certainly got all those things, but the timing was just a tad off.

    Long time members will remember I’ve been writing about gold’s potential Inverted Head & Shoulders Pattern for years. This post from September 2017 comes to mind.

    As I stated in that last update, I think TPTB will do whatever it takes to keep that giant IH&S targeting 1721 from playing out. The only thing I can see outweighing their efforts would be a true black swan event such as open warfare on the Korean Peninsula.

    Sure enough, every time GC got close to that neckline (the dashed yellow line above), it was smacked down by as much as 18%. It has happened 9 times since July 2016.  It was nice for trading purposes, but frustrating to the many gold bugs out there.

    While rising oil and gas prices were helpful to Aramco’s share offering in 2019, they disrupted the delicate balance between inflation and interest rates and sent a clear signal that it was finally time for GC to break out — which it finally did last June.

    Since then, it’s been a matter of waiting for the rising price channel to reach our upside targets. It might have been a long wait if not for the coronavirus. We managed to avoid war with North Korea, but this smaller, deadlier enemy was plenty Black Swan enough for the Fed.

    A few trillion in QE later, GC has reached our 1735 target — well ahead of schedule and after a very dramatic SMA200 backtest.

    Is the run over, or is there more to come?

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  • Update on Oil: Apr 6, 2020

    Many seasoned investors are surprised to see how positively correlated stock returns have been to oil prices. Energy stocks make up 8% of the overall market, so you’d expect them to have some influence. But, thanks to the increasing prominence of algorithms and quantitative trading, the impact has grown well beyond what 8% should contribute – with most of the market’s significant highs and lows perfectly aligned with oil’s over the years.A 2017 study by JP Morgan estimated that only 10% of trading volume is by discretionary investors who focus on fundamentals. This means that 90% of all volume is driven by passive and quantitative techniques including everything from index funds and ETFs to high-frequency trading and corporate buybacks.

    The tail that wags the quantitative dog is algorithmic trading, where hundreds or even thousands of factors are constantly monitored and provide instant input for trading decisions.  While these factors include big picture economic data such as interest rates, inflation or employment figures, the Big Three that consistently drive big moves on a daily basis are VIX, the USDJPY and the price of oil – specifically WTI futures [CL.]

    Oil is the only one of the Big Three which has an almost immediate and substantial impact on the US economy. So, when prices are manipulated higher or lower, we see a change in inflation data, interest rates and, of course, stock prices.

    This is why we were able to call the top on October 3, 2018:

    CL and RB…not only reached overhead resistance by our measure, but must deal with inflation that’s too high, bearish API data, another round of Trump tweeting, and a large build in EIA inventory. I think the time has finally come to revert to short…

    CPI had recently reached almost 3%, dragging interest rates higher as well. The 10-YR reached 3.25% on Oct 5, threatening to break out of a channel dating back over 20 years at a time when debt was exploding higher.

    Trump had been jawboning and tweeting his desire for lower oil prices. But, his entreaties had fallen on deaf ears until Oct 3, when journalist Jamal Khashoggi was brutally murdered and dismembered by agents of Saudi Arabia for criticizing Saudi Crown Prince Mohammad Bin Salman (MBS.)

    As details emerged and MBS’ complicity became evident, Saudi Arabia suddenly needed friends in high places. Trump was happy to oblige, but had one condition: oil prices needed to decline immediately – which they did.  CL plunged 45%  over the next 11 weeks.The YoY drop in oil and gas prices was immediately reflected in inflation. CPI dropped from 2.52% in October to 2.18% in November and a low of 1.52% by February 2019.

    The 10-YR dropped from 3.25% in October 2018 to 2.36% by March 2019.  Prices at the pump plunged as well, and Americans rejoiced at more affordable commuting costs.

    Remember, oil is one of the Big Three drivers of stock prices. So stocks plunged as well – shedding about 20% by December, when Treasury Secretary Mnuchin convened the Plunge Protection Team to prop up the market – enabling stocks to reach new highs while CL merely enjoyed an extended bounce.Saudi Arabia needed the bounce every bit as much as did stocks. The troubled Aramco share offering had been delayed time and again, and higher oil prices made a larger raise possible. The plunge resumed within a few weeks of the IPO.Then came the slowdown.  Demand had already been ebbing and prices had been settling lower for weeks. But, after a very brief bounce, oil prices plunged when COVID-19 came onto the scene. Suddenly, fundamentals mattered again.

    Prices plunged to the bottom of a falling channel from 2008 over 3 years ahead of schedule per the cycle study we first posted in March 2019 [see: Macro Cycles and Regime Shifts.]This added fuel to the fire for stocks, which already had plenty of reason to plunge as global economic activity screeched to a halt.  Algos, which might normally have been employed to prop up stocks, were pressuring them lower.  At the same time, the USDJPY was falling as the Japanese yen rallied and VIX spiked higher on greatly increased volatility.

    Note that long-term trends in gasoline prices were also in danger of breaking down.

    Perhaps more alarming to Team Trump, the Dow had fallen to levels not seen since the 2016 election. The energy industry is vitally important to the US, with millions of jobs and billions in loans dependent on prices stabilizing. It’s no surprise that the federal government would support it as it has many other industries which have been decimated by the global pandemic. Many majors oppose price supports, perhaps hoping to scoop up highly-leveraged players at a bargain price when they failed.

    However, instead of making low or no-interest loans available to tide the industry over as it has with every other affected industry, Trump has focused on artificially inflating prices — first with a series of Tweets and lately with a threat to impose tariffs on imported oil.

    As a result, oil has spiked over 50% higher in a mere 4 sessions…

    …facilitating a 24% bounce in the Dow.

    While some are thrilled with the outcome, there are winners and losers. The biggest losers are those who can least afford it: consumers. Higher oil and gas prices are a regressive tax on those consumers who must still drive (disproportionately those less affluent) or buy heating oil or natural gas to keep their families warm during the waning days of cold weather.

    It’s important to recognize that Trump’s insistence on higher oil prices might be partly about saving oil industry jobs, but it’s really about saving the stock market which has learned to take its cues from oil prices.

    If Trump’s “friend” Mohammad Bin Salman — a “man of the people” — still owes any chits from 2018, oil prices could be well supported going forward. But, of course, it will require the assistance of Trump’s other friend, Vladimir Putin, whose willingness to cut back production involves slightly different priorities.

    With COVID-19 deaths in the US topping 10,000, Putin’s response will be important in crafting the next headline-stealing development. But, most studies I’ve seen indicate that supply now exceeds demand by at least 25 million bpd. So, even the 10-15 million cut suggested by Trump would do nothing to erase the massive oversupply but would merely slow the rate at which the excess is building.

    Rumor has it that Russia will play ball as long as every other oil producing nation is willing to share the pain – including US shale producers, many of were already on life support before COVID-19 (and expect a decent return on their political donations.)

    If I sell you 100 barrels at $30 instead of 200 at $15, have I made any more money?  Will I now be able to pay back that overdue loan?  Will the market reward my stock? Unfortunately, it only works if the pain is borne by the other guys — which will likely boil down to good, old-fashioned horse trading.  Trump’s opening ante is throwing down-and-out Americans under the bus. We’ll see if it’s enough.

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  • Update on DJIA: Mar 18, 2020

    In our last dedicated update on the Dow [see: July 2019 Update], we noted the intersection of a number of overhead resistance features in its chart and offered some thoughts on its downside potential if it managed to reverse.

    Note that our 18974 target represents a backtest of the red channel from which DJIA broke out and backtested between 2014-2016 as well as the white 1.618. A May 2020 bottom at 18974ish would align nicely with the SPX 2138 target indicated by our analog.

    I posted my charts on July 29 (the yellow arrow) and was roundly cheered when he Dow cratered 7% over the next two weeks, even closing below its 200-DMA……and was loudly jeered when it made that up and went on to new all-time highs. I’ve seen this sort of thing so often from the Dow that I was pretty hot under the collar. I’m pretty sure an older (yes, there are a few) wiser colleague took me aside and muttered “Forget it, Pebble, it’s the Dow.”

    So, I did. You see, when it comes to manipulation the Dow is the all-time champ: share price weighted, with the ability to kick out losers and slide in winners whenever you like? How is this even an index?

    When the market reversed on cue in mid-February [see: A New Day, Same Old Nonsense]  I don’t think I even checked to see where the Dow was (the blue arrow below.) I’ll admit I got curious when it closed below its 200-DMA on Feb 25. But, I didn’t inhale. I stayed focused on real indices, cratering oil prices and the bond market.Well…guess where it landed today?  Go ahead.  I’ll wait.

    You guessed it. Right where our July 2019 forecast said: the bottom of the falling red channel where it intersected with the top of the rising red channel and the 1.618 Fib extension at 18974. It’s a 33% drop from stem to stern. You can’t make this stuff up.

    Knowing we have a global pandemic on our hands and a minimum of a quarter of negative GDP ahead of us, surely it’ll keep going, right?  I mean, did you hear Bill Ackman today?  Hell is coming!  So, the Dow is positioned for a bounce.  That’s right.  IF oil and gas can continue bouncing, and IF USDJPY can pop up through its SMA200 and IF VIX breaks down and IF the 2s10s craters back below 48 bps, then DJIA will definitely probably bounce.  At least a little.

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  • Just Two Charts

    Two charts best define the day we had yesterday.

    First, VIX tagged our next highest target: the intersection of the .786 Fibonacci retracement and the trend line connecting two previous highs.

    The other one was the SPX arithmetic (as opposed to log) chart, which stopped on a dime at the channel bottom.The bleeding continued well past the Fed’s ineffectual $1.5 trillion injection and had to wait until the low-volume aftermarket to be staunched. At that point, central bankers went to work – pumping oil and gas, the dollar, interest rates and currencies in order to restore confidence whip up the algos. It worked…at least so far.

    I’ll have a separate post up later regarding COVID-19, including my latest projections for the US.

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  • The Storm Finally Arrives

    After weeks of gathering clouds, the storm we’ve been watching has finally arrived. S&P futures are lock limit down just a few points above our next downside target.

    Not surprisingly, all of our other targets across currencies, commodities and fixed income have either tagged or exceeded our next downside targets, with more to go once the cash market opens.

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  • Burning Down the House

    Once upon a time, a few boys whose families owned the biggest lemon groves in town got together and opened up a lemonade stand. It was a very hot summer, so they sold an enormous amount of ice-cold lemonade. Since they controlled the supply of lemons, they were able to quickly raise prices from 10 cents per glass to as much as $1.50. Their customers didn’t mind as they could afford 1.50, it was excellent lemonade, and there were no alternatives. They like it so much, in fact, they invested $2 trillion in shares of the stand.

    One day a freak storm hit town, and the temperature dropped from 95 to 25 degrees in a matter of hours. The weatherman said it could last for months. Not many people were interested in ice-cold lemonade, even though the boys frantically dropped their prices. They even tried cutting back on the amount of lemonade they made. For some reason, this had no effect on sales, and prices continued to drop. A few boys split away from the group and tried selling cheaper lemonade on their own, but this further depressed prices. Soon, the lemonade stand went out of business. The end.

    And that, boys and girls, is how OPEC came to be in their current predicament.

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  • Decision Time, Again

    We start this morning’s post with a peek at the Russell 2000 as it perfectly illustrates the dilemma facing the broader markets this morning.

    Up until September 2017, RUT followed a well-defined rising channel shown below in yellow.  Like all channels, it was defined by the tops and bottoms along the way. The only problem: The channel was rising only about 5% per year – hardly enough to get excited about. By late 2016, it had become obvious that algos had more influence than discretionary, fundamentally-oriented investors. The algos were, in turn, influenced by certain factors which central banks and their proxies could usually control quite easily.  By wagging the tail (the factors) the whole dog (the market) would usually fall in line.

    In September 2017, after RUT had been bumping up against the top of the rising yellow channel for over 9 months, the factors went to work and RUT  broke out of the yellow channel and rose 21% over the next year. The slope of the new rising white channel was good for about 20% per year.

    Everything was going well until September 2018 when RUT topped out at 1742 and plunged 27% in only three months. To make matters worse, the new rising white channel broke down and RUT fell back below the top of the yellow channel from which it had broken out.

    It spent the better part of the next year trying to break out of the yellow channel again – failing seven times until Dec 4, 2019, when it finally shot above the channel top and remained there. There was a scare last month when, on Jan 31, it successfully backtested the channel top and bounced 5.5%.

    Given yesterday’s carnage, though, it has fallen back to the top of the yellow channel where it faces that same important test all over again.  If it holds, all is well and investors can go back to mindless trend following.

    Even if it doesn’t, the SMA200 is now up to 1574, a modest 3.3% below yesterday’s close. But dropping through 1616ish would mean breaking down below the horizontal support (which served as overhead resistance between Oct 2018 and Dec 2019.) It could accelerate losses and complicate the rescue mission.RUT is typical of many of the indices and individual equities I chart every day. The Dow, for instance, faces a similar test at 27,700.And, SPX and ES completed important backtests (the purple channel top below) in the process of tagging our next downside targets yesterday.Given the way the factors are behaving this morning, there is a good possibility that we’ll see additional backtest targets such as DJIA 27,700 tested today. But, that would mean taking a chance on the algos’ ability to rescue stocks from some very risky waters.

    Stay tuned.

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  • When Will News Begin to Matter Again?

    Apparently AAPL slashing guidance is inconsequential and Bill Gates, who is predicting 10 million deaths, is some sort of conspiracy theorist – because the market continues to ignore the coronavirus story. Perhaps somewhere down the line the investing world will come to realize what we’ve known for years: stocks have become increasingly easy to manipulate.

    Lately, it has been VIX’s constant smackdowns below various measures of support and the perennial games played with currencies which have directed algos to buy every dip.  With oil and EURUSD having reached important downside targets, the formula might change somewhat. But, at what point will the game be obvious to all?

    Futures are off about 15 points, not even 1/2% after a slew of dreadful headlines over the weekend.

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  • FOMC Day: Jan 29, 2020

    Futures are higher this morning on what is expected to be a non-event FOMC announcement and press conference. I suspect attention will again return to currencies, as the US dollar’s surge over the past month, combined with the big drop we had anticipated in oil and gas, will serve to tamp down inflation fears.  Of course, there’s a fine line between falling inflation fears and growing deflation fears.The bond market continues to reinforce the bearish case for stocks.

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