Its back, the oil problem
It was only a matter of time before oil touched its strong support near the $110 level and rebounded quickly. Stock traders were taken off guard as the commodity jumped $5 per barrel on tensions between Russia and Georgia and capitalizing traders pushed prices higher. If oil prices continue this what seems like never ending climb, the stock market is due for a tailspin. With the Dow rushing towards 11700 on what seemed like thin news events, the oil market is livening up and proving that it will be a player in today’s stock market.
Its unfortunate for traders looking to buy quality companies. When the oil market exerts so much of its pressures not only on commodities, and especially metals and even currencies, it also has a profound impact on the overall stock market. Oil up means stock market down, and generally a hefty decline even though the market was able to escape its wrath this time. An early open to the negative terrority waned to a modest gain, probably resulting from oil companies more than anything. The S&P500 performed very well after making early lows but settling with a positive net gain.
Going forward any price of crude oil greater than $130 is likely to send shockwaves through the market. Even after a large 20% consolidation in oil prices the market only rallied but a few percentage points. This market is feeding on the bad news and buying little on good news showing investors sentiment isn’t where it needs to be for a true bear market run. Couple this with rumors and speculation on the status of any large bank and you’re prepared for a total market sell off.
This week coming ahead I’d be patient when entering the market. Short positions are inherently safer as people are selling rather than buying but the oilers are likely to rally on positive fundamentals and a bit of a short squeeze.
Moves by the CFTC to try and regulate the oil trading market and prevent the kind of speculation which has seen crude oil prices rise from $30 per barrel back towards $70+ this year took an interesting twist yesterday when it was announced that the weekly COT data would now include new details on the aggregate holdings of the big Wall Street dealers, hedge funds and other financial participants. COT data is a useful market sentiment tool but as many of the market participants both hedge and speculate it has become increasingly difficult to analyse. According to the CFTC the new format will be making its debut next Friday.