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Data released this morning and afternoon could lead to market shifts that could influence the intermediate term trends for the financial markets.
Tuesday's trading was lackluster, as traders were more concerned with the potential market moving events scheduled for Wednesday, the Fed's announcement on monetary policy and to a lesser degree, the latest oil inventory data from the U.S. Energy Information agency. The first will be released at 10:30 Eastern Time, while the latter is usually released at 2:00 Eastern time.
At stake for traders are two major factors. One is what the Federal Reserve says and does with regard to interest rates and its future actions on inflation. The second is what will the price of oil do in response to the latest supply data put forth by the U.S. Energy Information Agency (EIA). Both really go hand in hand, since the price of oil has risen to levels where economists and traders are starting to fret about the potential for a second dip in the U.S. recession.
That means that the Federal Reserve is walking a very tight line with regard to its future policy. Traders want to hear that the Fed is vigilant on inflation. But they also want to know that the Fed isn’t going to start raising interest rates too soon, especially with oil prices rising, at least relatively speaking.
For the Fed, there are two questions. How much longer will they keep monetary policy at near zero rates? And what will they do with regard to inflation?
If history holds up, we can expect a rally after the Fed makes its announcement, followed by some selling. That of course is more likey if the market likes what the central bank says at first blush. As The Wall Street Journal points out: "The Dow Jones Industrial Average has risen by 2.5%, on average, on each of the past four Fed decision days. Three of those four rallies were followed, however, by sharp declines that erased the gains."
Still, there is lots of uncertainty about what the Fed has in mind, which, as the Journal points out, "raises the potential for a lot of investors to be surprised -- mainly because there are so many possible permutations of future Fed policy."
Chart Courtesy of StockCharts.com
From a charting standpoint, the S & P 500 (SPX) has major resistance now near the 897-900 area, which is for all intents and purposes the 50-day moving average. A failure to close above that for the index could lead to a test of the 880 area, or even lower prices.
Oil is a different story, as it has been selling off aggressively of late. A potential clue to the EIA figures was provided in the figures released Tuesday, after the market closed by the American Petroleum Institute (API). The API survey reported a rise in gasoline stores for last week of 3.7 million barrels, where traders were expecting a rise of only 1.3 million barrels. Distillate levels (heating oil and diesel fuel) also rose, beyond expectations, while crude oil supplies remained fairly stable.
The caveat in the API numbers is that they often differ from the more highly regarded EIA numbers, as the methodology used for the surveys and the estimates differ. Yet, much of the time, the general trend of the numbers remains the same. If the numbers are similar, we would expect a further fall in the price of oil. At the same time, though, the markets could interpret rising fuel supplies as a sign of a weakening economy. That means that any kind of talk from the Fed that seems aggressive could lead to more weakness in stocks.
Chart Courtesy of StockCharts.com
Crude has been pulling back of late, along with the stock market, with the $65 area looking to be the next major support area to be tested.
Conclusion
The stock market is clearly brittle right now. The 20 and the 50-day moving averages have been breached on the S & P 500. And more important from a charting standpoint is the fact that the 200-day moving average, the line between bull and bear markets is now being tested.
That means that the action in the next few days has significant meaning for the short, intermediate, and long term trend for stocks. A failure at this juncture would be very significant.
Oil has been confirming the rally in stocks for weeks, as investors have put both markets in the forefront of their bets for an economic recovery. That both markets are faltering simultaneously is confirmation of shifting perceptions among traders and investors, toward a more cautious stance.
From a trading standpoint, this is a good time to be very conservative. Our stock exposure, including our energy positions have been pared considerably over the last few days. We are now almost 100% in cash, after a nice run of profits, especially in energy and in our Fallen Angels section, and do have an open short position in the S & P 500 via the Short S & P 500 ETF (NYSE: SH).
We are cautiously long bonds, and cautiously short gold.
If we're wrong, we can always buy back into the market.
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