Crude Realities Hit Wall Street; One Noted Technician Forecasts Another 12 Percent Decline For The S And P; West Texas Crude Trading At $48.62 Per Barrel This Morning – Light Sweet Crude – $51.56
A sea of red permeated Wall Street yesterday, as worries over the Eurozone, particularly Greece, and the decline in oil led the rout into the close. For the day, yesterday, the DOW lost 331pts., or -1.86 percent to close at 17,502; while the S and P 500 fell 37.62pts., or -1.83 percent; to 2020; and, the tech-heavy NASDAQ declined 74.24pts., or -1.57 percent, to 4,652. Oil, once again, got routed, with Brent losing $3.27, or -5.8 percent, to $$53.15, while West Texas Crude lost 2 cents, to $50.03. This morning, West Texas crude is trading below $50 at $48.62.
How much lower do we go in oil? Everyone is guessing of course; but, consensus seems to be the $45 dollar range as the next key level of resistance. Some commodities watchers are saying oil is oversold and is a screaming buy, while others say crude may soon find a bottom — but, are advising their clients not to jump in, because they don’t believe crude will return to the $70/$80 range till the fall of this year — at the earliest.
No one knows for sure of course; but, one thing we do know is that oil was trading at $107 a barrel this past June. So, we’re down nearly 60 percent. I may start to leverage in — in selected oil ETFs and stocks; and, I have posted some ideas in my past few notes — particularly this Sunday and the previous Sunday, if you want to re-read them on the blog.
As Warren Buffet once said, “you get to see who is swimming naked when the tide goes out.” We will likely see very soon “who is swimming naked” in the oil sector. Companies that are over-leveraged, poorly or only average in management, and those that lack quality and quantity of assets could see their companies wiped out, We are also likely to see a fair amount of mergers and acquisitions as the buzzards begin to circle and pick off their prey. If I can get some ideas on potential takeover candidates in the oil sector, I will post them. Another worrisome issue is the fraking and shale sectors of the U.S. economy is where we’ve experienced the largest job growth in the past two years. If companies in these sectors begin to shutdown or go dormant — we could see a reversal of good job numbers that we/’ve become accustomed to.
This freefall in oil is wreaking havoc in Venezuela and Russia in particular. Societe General has a 90 percent chance that Venezuela defaults on its debt by the end of this year, or early 2016. Venezuela’s president was in China recently with his hat in hand — hoping for a Chinese parachute. How China sees oil prices playing out in the next 6-12 months will play a big factor in whether or not the give Venezuela any financial relief. Having said that, Societe General doesn’t think it will be big enough to prevent a debt default in the next 12-18 months. Russia is also likely to get a debt downgrade from the ratings agencies S and P and Moody’s, and, they also think there is a good chance we’ll see social unrest in Russia as the ruble implodes and the economy tanks.
Greek Parliamentary Elections On January 25 Could Set The Stage For a Greek Exit From The Eurozone And Have Negative Global Repercussions For Stocks
And, if that isn’t enough, Greek parliamentary elections on January 25th are raising concern over the potential success of the radical left/socialist party in the upcoming elections. The radical left Syriza Party, led by Alexis Tsipras, is set on reversing the past half-decade of austerity policies “forced” on it by the EU; and, he also advocates a big haircut for creditors (mainly German taxpayers), an increase in the minimum wage and pensions, free electricity and food stamps, shelter and health care for those who need it, and, a moratorium on private debt payments to banks — above 20 percent of disposable income. Tsipras has also insisted that his government “would cease to enforce the EU bail-out demands, from his first day in office.” Tsipras is leading in the polls; those his lead has slimmed in recent days to 3 percent as we approach January 25.
If Tsipras does pull out a victory, and stands by his campaign rhetoric, then the exit of Greece from the Eurozone is highly likely. As Dan Steinbock recently wrote on CNBC’s website, “the impending Greek elections will reframe the Euro crisis in terms of debt relief. That will force new, and adverse scenarios on the region; and the repercussions will be global,” he warns.
Mark Grant, Managing Director of Southwest Securities, and an noted expert on Europe and the Eurozone, said this morning in an interview on CNBC’s Squawk Box that “2015 is setting up to be a very difficult year for the Eurozone. He contends that the creation of the Euro has been a huge failure, “there are too many warring tribes,” and the smartest counties — i.e. the U.K. — were the ones that didn’t join the EU, and kept their own currency. Mr. Grant doesn’t think that a QE-type boost Chairman Mario Draghi will do any real good; and, argues that “Draghi is out of bullets.” He sees continued, and worsening deflation, and more social unrest and economic troubles, which could once again put the future of the Euro as an entity — in jeopardy.
Does Yesterday’s Selloff In Stocks Presage More Selling, Or — Buying On The Dip? The January Barometer
U.S. stock futures were up across the board last night; but, they turned red this morning — but, moderately — and are currently set to open lower this morning — if they continue their present trend. Asian and European equities followed Wall Street’s lead and sold off overnight, with the Shanghai Composite being the lone bright spot. We did not get panic or capitulation selling yesterday; and, that was somewhat promising; but, I am certainly uneasy here and remain overwhelmingly in a cash position with respect to the portfolio this morning Today will be an important barometer. Do we open higher, only to resume selling in the afternoon and into the close?, which would be bearish. Or, do we have a bounce-back to end positive — which would normally be a good sign; but, it could also be what the street refers to as a “dead-cat bounce,” which is a fake out, luring investors in, only to resume its downward trend in the following days. Remember, its the second mouse that always gets the cheese. My guess is we have more to the downside to go; but, the market often does things you don’t expect.
Someone who is considered one of the top forecasters on the street — unfortunately for those of you who are still mostly invested in stocks this morning — sees a much sharper selloff in the coming days and weeks (more on that later). The S and P closed at 2020 yesterday; and, this well-respected technician thinks we could see the S & P at 1,820 before all is said and done — about another 12 percent to the downside from today’s close.
Carter Braxton Worth, Managing Director, and Chief Market Technician at Sterne Agee, was interviewed on CNBC’s Fast Money yesterday evening to go over his analysis While he acknowledged things don’t necessarily have to turn out the way he thinks — he believe his odds of being right about the index’s direction are good. Mr. Worth went over some time-honored wisdom that has been gained in the past 100 years of trading to reach some judgments about where we’re likely to go next.in the index.
The January Effect: How Goes January — So Goes The Year
Mr. Worth discussed the so-called January effect, — so goes the first five days of trading — so goes the rest of the year. Going back to 1927, the stock market is down for the year 34 percent of the time. So, in any given year, chances are more likely that stocks will end the year in positive territory. But, if the first five days of January are down, — we go from having a 34 percent chance of being down for the year — to a 56 percent chance of being down for the year. And, if the month of January is down as a whole — then there is a 58 percent chance of the year being down. Again, history doesn’t necessarily repeat; but, the odds favor a poor year in stocks if the first five days and the first month is down.
One bright spot, Mr. Worth said that the best performing U.S. sector during these down years — is housing and home builders. Interesting. V/R, RCP