Oil: $110 and Climbing

It was a choppy day of trading with the major averages spending the bulk of the trading session below the neutral line. The biggest move of the day came just after 10:30 a.m. EST when news of another earthquake in Japan hit the wires and spiked the averages moderately lower. But it didn't take long for the broader market to find a bottom and by the close the market managed to post only modest losses overall.

In economic news, the European Central Bank hiked lending rates for the first time since mid-2008. Their key lending rate now sits at 1.25%.
Both the Bank of England and the Bank of Japan, who had meetings of their own, kept their target rates unchanged.

Oil prices hit another two-year high today, closing at $110.30 per barrel. That means oil has risen more than 20% since the beginning of the year.

On the domestic economic data front, the latest jobless claims data totaled 382,000, which was down 10,000 from the previous week and only slightly less than the 386,000 initial claims that had been expected. Continuing claims dipped modestly to 3.72 million after last week's reading of 3.73 million.

Here's the charts:



NAMO and NYMO both fell harder than I would have expected today and could be foretelling a bigger decline ahead. But I can't embrace that outlook after one day of weakness. They are flashing sells nonetheless.



NAHL and NYHL are also now flashing sells.



TRIN and TRINQ remained in a buy condition.



BPCOMPQ actually ebbed a bit higher today and remains on a buy.

So 3 of 7 signals remain on buys, which keeps the Seven Sentinels in a buy condition.

I'm not surprised by the weakness today, and I'm thinking this is another buying opportunity for those who want to go long. The weakness may not be over, but it's hard to see the market giving back too much more given (guess what) liquidity.

In response to a question I was asked about what liquidity means in layman terms. Here's a good commentary on POMO, but it's from last November so it's mixed with market data from that time frame. However, you can skip to about the 7 minute mark to get directly into the POMO explanation.

http://www.youtube.com/watch?v=_ezRlDT5LkQ&feature=related

 

[Sensei]

Thanks for the link. It makes sense. There's a slide that shows, in very simple terms, that the Fed loans money to banks, who in turn invest that money in stocks. So the Fed is propping up the stock market. In that case, as long as this is occurring, buy and hold isn't such a bad approach.

 

[MrBowl]

When the Fed announced the QE2 idea in late Aug that began this great rally. The official announcement didnt come until early Nov so there was an anticipatory reaction in the market prior to the event. Everyone is trying to guess when the negative anticipatory action will commence in response to the end of the Fed's POMO, which will be in late June. I think the oil price matters more now than the end of POMO, but who knows. A bigger question is whether the market can carry these levels on its own without POMO. If so, a lot of folks' strategies will be wrong. Also, if I'm right that so many people are planning their strategy based on the end of POMO then it may be a better strategy to plan your own strategy based on the anticpated movement of the herd.

 

[crws]

Sound familiar?
Fears of a Commodity Crash Grow

The “culprit” is the new breed of commodity index funds. Each week over the last two months, between $5bn and $10bn of fresh money has been pouring into the Goldman Sachs Commodity Index, the Dow Jones-AIG Commodity Index, and other funds, according to a UBS study. Together, the indexes now hold $200bn.

“Some commodities have leapt into the stratosphere over the last year: they’ve been pushed higher than the fundamentals merit,” said John Reade, head of the UBS metals team. The buyers are typically big institutions such as Calpers (the California retirement fund), or the Dutch pension funds.

“This is passive long-only investment, so it is not really a bubble. It would be a much bigger problem if it was leveraged speculation,” Mr Reade said.

Crude oil has surged to $104 a barrel, yet US gasoline inventories are at the highest level in 14 years. Oil stocks have been rising for the last seven weeks, even though we are at the top of the winter season when inventories normally fall. The tsunami of pension money is beginning to distort the market for energy futures. Texas oilman T Boone Pickens said investment froth has pushed up prices by $15.

This is not to downplay the powerful reasons behind the oil boom. Output has been flat for four years despite efforts by BP, Shell and peers to find new supplies, yet China’s oil imports rose 14pc in 2007. The era of ‘peak oil’ is certainly with us. But it was with us a decade ago when oil prices fell to $10 a barrel.
Mr Steel said inflated oil prices were automatically spilling over into gold, since energy makes up 65pc of the index baskets. The funds have to buy non-oil commodities to keep the weighting constant. Gold would normally fall in February for seasonal reasons.

If oil tumbles we will find out whether gold really has regained its status as a hard currency, a haven for investor flight from discredited paper in a world of sub-prime wreckage, or whether it is still a cyclical commodity like the others.

The bullish case is strongest for the “Ags”, above all grains such as soybeans, corn, and wheat.

The Commodities Boom of 2011: Coal Will Be the New Gold

 

[coolhand]

Another question is whether there will be an extension of QE2 or rollout of QE3. Will the powers that be really be ready to take away the punchbowl? Is the economy ready? And if they extend QE2 or begin QE3 will the market embrace it with the same enthusiasm?

When the Fed announced the QE2 idea in late Aug that began this great rally. The official announcement didnt come until early Nov so there was an anticipatory reaction in the market prior to the event. Everyone is trying to guess when the negative anticipatory action will commence in response to the end of the Fed's POMO, which will be in late June. I think the oil price matters more now than the end of POMO, but who knows. A bigger question is whether the market can carry these levels on its own without POMO. If so, a lot of folks' strategies will be wrong. Also, if I'm right that so many people are planning their strategy based on the end of POMO then it may be a better strategy to plan your own strategy based on the anticpated movement of the herd.

 

[MrBowl]

coolhand, right. those are real possibilities that I did not address. Interesting times, indeed.

 

[EmoDx]

I would have designed QE1 and QE2 on a modified bell curve. I would have decided on a 8 - 16 month curve, ramp up to the peak within the first qtr and then a long slow taper to 0.

The type of recession we were in required bold steps. QE2 was a bold step, but transparency would have been better. If the markets knew the amount , frequency, and duration then the jos recovery would be more meaningful and the FED could keep easing while slowly ramping up interest rates towards the end.

For example, if prior to starting QE, the FED announced this plan and said that 3 months prior to ending QE2, he would increase interest rates .15% a month for 3-4 months we would have a more meaningful recovery.

In the example given, businesses would know what to expect and when, banks would be able to extrapolate loans, and the consumer would know when to refinance loans and when to get in/out of the market.

All of this points to show how the FED is a crooked SOB.

-E