|Dow||+102.75 to 17,879.55|
|S&P 500||+13.11 to 2,066.55|
|Nasdaq||+28.46 to 4,755.81|
|10-YR Yield||+0.07 to 2.29%|
|Gold||-$20.10 to $1,197.90|
|Crude Oil||-$1.85 to $67.17|
Sometimes, I write about market fundamentals. Sometimes, I write about the economy. But sometimes, you can convey a heck of a lot more information from just one or two charts. And when it comes to energy and interest rates, boy is that ever true right now!
Look, you know by now that OPEC didn’t cut production at last week’s meeting in Vienna. That helped pull the rug out from under crude oil prices, sending U.S. oil futures to just under $64. We haven’t seen prices that cheap since mid-2009 – right after the Great Recession!
You probably know that interest rates have generally been heading lower in 2014, too. Not because of economic weakness or policy here, mind you. The U.S. economy just notched the strongest six months of growth since 2003, while the U.S. Federal Reserve just ended its QE money-printing program.
But that hasn’t mattered as much as it normally would because Europe, China and Japan are all struggling and printing money like mad. Those massive waves of money aren’t staying bottled up at home or helping their domestic economies – they’re washing up on our shores and boosting U.S. stocks, bonds and the dollar.
At some point though – in any market – you reach a capitulation point. Panic selling gets so intense that everyone who wants to sell already has.
When selling does dry up like that, it sets the stage for massive (and potentially very profitable) reversals … the kind you only see every few years!
With that in mind, I want you to look at the following two charts. The first shows the yield on the 10-year Treasury Note, while the second shows the Energy Select Sector SPDR Fund (XLE):
(Click image to enlarge)
(Click image to enlarge)
What do I see? I see large, panic-driven, waterfall declines. Those declines sent the 10-year yield down to 1.87 percent from around 2.65 percent, and the price of the XLE down to less than $78 from just over $101.
Then they both culminated in massive, spike lows in mid-October. A sharp rally ensued, followed by a “re-test” of the lows in the past couple of days. On those re-tests, we saw lighter volume, less selling, and higher lows in price.
My colleagues Mark Najarian and Mandeep Rai discussed the fundamental forces impacting oil yesterday. But even if you didn’t know one whit about the fundamentals of oil or interest rates, the technical action here is very encouraging.
It suggests we are, in fact, washed out. We may have gotten to a point where both interest rates and energy stocks have priced in all the potential negative news, setting the stage for one of those very sharp reversals I mentioned earlier.
So if you’ve been biding your time, looking for an entry point in either of these markets, pay close attention. It may just be about time to pounce! Everything from inverse ETFs that rise in price when interest rates climb to select, energy stocks or Master Limited Partnerships focused on the domestic energy renaissance would be my favorite vehicles.
What do you think? Is OPEC’s latest gambit a disaster for the energy sector? Or have we priced in all the negatives out there, and is that making bargain-hunting attractive again?
Where do you expect oil prices or interest rates to go over the next year? Higher? Lower? What specific targets do you have, and why? Hit me up at the Money and Markets website with your thoughts when you have a minute!
|Our Readers Speak|
In the meantime, you had a lot to say about the benefits, drawbacks, causes and potential responses to falling energy prices on the website overnight.
Reader Gwen P. said we should be taking advantage of it to top off our emergency supplies. Her comments: “What the U.S. should be doing with the low oil prices is to buy for our strategic reserves. Think ‘save money’ while the price is low. Be sure we are buying U.S. oil, not foreign!”
|Pump prices are falling. Should we increase the gasoline tax to help fund infrastructure improvements?|
Meanwhile, Reader Scott D. said we should boost taxes with energy prices low. That way, we can fund infrastructure improvements without taking too big of a chunk out of American pocketbooks and wallets. His comments:
“Absolutely raise the gasoline tax to rebuild the roads and bridges. It will help push oil prices down further by reducing demand slightly and our economy will still be stimulated by prices that are down over a dollar. One caveat: The money must be spent on improving roads and not siphoned off for other government programs including rail.”
Reader JP F. took a longer-term view toward OPEC’s latest action – and how the U.S. should respond. Here’s the summary:
“Do YOU really believe Saudi Arabia has your best interests in mind with ‘cheap oil’ prices now? Where were they when oil hit $140 a barrel and gasoline topped $4.50 in my hood? They were still pumping it out for $10!
“It is merely a ploy to bankrupt the more expensive U.S. producers. If we do nothing, these firms will limit production, exploration, and ultimately close.
“Sure, it feels good those low gas prices, right? How will it feel when there is no competition except the Saudis, Kuwaitis, and Venezuela? How will it feel when prices over-correct to the high side?
“The ‘smart answer’ is an import tax to increase the cost of domestically used fuel to roughly the $3 level per gallon. That normalizes prices for all, and offers some protection to our own producers. Protection is Prevention of Chaos later.”
We’ll see what happens in the coming weeks and months. But as I’ve made clear for the past several months, I don’t believe the American energy renaissance is kaput. Nor do I believe OPEC can stomach low oil prices for long. Throw in the encouraging technical action I’m seeing (not just in energy, but in interest rates) and I’d much rather be a buyer than a seller here.
But as always, the comment section online is the best place to weigh in. Here’s the link.
|Other Developments of the Day|
Gas prices may be going down. But the cost of everything from health care to cell phone service is going up, sticking the American Middle Class with the bill. That’s the thesis of this Wall Street Journal story.
The piece notes that households earning between $18,000 and $95,000 (pretax) have seen incomes stagnate since 2007 even as inflation has risen 12%. Result: Little net progress for average Americans, and less spending on the fun things in life because all our dough is going towards things like health insurance premiums.
Then again, struggling carriers Sprint (S, Weiss Ratings: D) is now trying to do something about high cell-phone bills. It’s rolling out a “half off” plan aimed squarely at AT&T (T, Weiss Ratings: B) and Verizon (VZ, Weiss Ratings: B). The idea: If you currently pay $200 per month to AT&T, you can get Sprint service for $100. Just show proof of your current bill.
Is the West trying to put pressure on ISIS by helping local authorities locate and detain the wife and son of the terrorist group’s leader? They were reportedly detained in Lebanon several days ago.
Billions of euros fleeing the threats of devaluation, economic stagnation and geopolitical turmoil have been “washing up” on our shore the past several months. So it’s only fair that blocks of a mysterious, rubber-like material (stamped “Tjipetir”) are washing up on Europe’s shores! This fascinating Washington Post story explains what the heck these enigmatic blocks are, and where they likely came from.
Remember, you can comment on these or any other matters by clicking here.
Until next time,