Friday, December 12, 2014

Jingle Bells

...Market sells (off), Oil lays an egg.  Oh what fun it is to trade an algorithm run financial market.  (I was never much of a poet.)  Well, boy oh boy do we have some interesting things to address, so we will dive right into it.

We have to talk about oil first.  As I write this, oil just broke 59, after breaking 60 last night.  Now down to $58.60/barrel.  Holy crap is all I can say.  In May of this year, oil was 107/barrel and it has now been roughly cut in half in 6 months.  This absolutely amazes me beyond anything else happening in the market right now.  Actually, scratch that.  What absolutely amazes me the most, is the amount of people who have NO CLUE what kind of implications this has.  I saw Rachel Maddow post a pic on Facebook a few weeks ago of a screen shot of a Fox News Broadcast.  The headline was "Is Falling Gas Prices Bad for the Economy?"  Her comment was something along the lines of "4 years ago Fox News was blaming high gas prices on Obama, now they're saying it's bad for the economy!"  Then she laughed and implied that Fox News was a complete joke (Which I don't disagree with, but so is MSNBC) Now, I'm not trying to get political or stir the pot up.   Both sides are full of shit and have no idea what there talking about.  But the point being made by Fox, was the DEFLATIONARY aspect of oil crashing as well as just about every other commodity out there which on avg have fallen about 30% or more recently.  Which certainly should be the major concern in this situation that her and the rest of America should worry about.  If they were capable of thinking past step 1 in any situation.  But I can't even fault Rachel.  She's a TV news reporter.  Jim Cramer however, who is talking everyday on CNBC about how great this is for the avg American, and is therefore WILDLY bullish on stocks, seems to think that the $200-300 a month the avg American will save on gas, they will then take and go buy stocks with.  Which first of all, HAHAHAHA!  Are you serious?  Do you really think that's where the money is going?  IF the avg American saves any significant amount of money due to lower gas, first and foremost, it will go toward paying down debt.  But even if it didn't go to that, the amount you are saving in gas is likely just now evening out with the amount more you have already been paying for health insurance.  But even if every penny of that went directly into stocks, it would not account for much in this multi trillion dollar financial system.  Shame on you Jim Cramer, you've been at this too long to say asinine stuff like that.  You've worked for Goldman, you manage millions of dollars. You should know better.

Now if oil is down 50% in 6 months, a natural thing to assume is that oil companies are making 50% less money now than they were 6 months ago.  But that's not the case, most people don't think about the cost of it.  So lets say that an oil company can produce a barrel of oil for $25.  At $100/barrel they are making $75 in profit.  If oil than falls 50% in 6 months and is now $50/barrel, their profit is now only $25/barrel.  Their profit dropped by 66%.  In 2012, Exxon earned $45 billion.  If that profit dropped 66% its now only $15 billion. I know, I know, "Only 15 billion".  Believe me, not me, or anyone else on this planet (except for maybe the politicians in Washington)  are crying over the oil companies profits, that's not the point.  The point is, that's $30 billion dollars of money that won't be in the economy anymore.  And that's just ONE oil company.  That far exceeds any benefit to the economy an extra $200-300 dollars a month the avg American will save.  Also, lets face it, if Exxon makes 30 billion less than they did last year, who do you think takes that hit?  Will the CEO get a reduced salary?  Will the board of directors get less stock options this year?  Hell no.  They are going to fire employees.  Starting always with the low to mid level jobs, of course.  And it won't just be them, but all the other oil companies or any other company who has taken a similar hit to their balance sheet due to falling commodity prices and the effects of DEFLATION.  And do you know who that is?  The avg American.  So now you're going to save a lot of money on gas prices, by not having a job to go to to begin with. Nothing is ever an isolated event.  And if Rachel Maddow, and Jim Cramer, and the rest of the world that think similarly realized that, maybe they would be as concerned about this as I am.

Below is the monthly chart.  I kept it simple, there's nothing to see in terms of technical indicators, you can pretty much get the idea, its all going straight down.  At this point 55 is a shoe-in, and likely if that happens, the momentum and the algos will probably send it down to 50.  If that level gives way, there's not much in the 40s in terms of support.  It's basically right down to that 40-35 level which was the lows in the financial crisis.  As far as Brent is concerned, they are reaching closer to par, and I suspect if 50 is reached and broken they will probably get there just below it in the 40s.  Ladies and Gentlemen, there are no excuses that can be made.  This oil chart is downright devastating.

Enough about oil now, there are other markets, but it does tie into a common theme.  You guessed it, DEFLATION.  So Europe is falling apart, and after years of talk, Draghi has said they will begin buying assets in their own QE attempt.  The Euro is collapsing and the dollar is soaring for reasons that some foolish people seem to believe are fundamental, or anything other than the fact that the Euro is collapsing along with most other currencies.  (Except gold.  In terms of every other major currency except dollars, Gold was actually UP this year.)  The dollar continues its reign as the cleanest shirt in the laundry pile.  Further East, Asia is slipping as well.  We seem to be the only ones immune to it...for now.  The SPX is beginning to falter.  Currently we are trying to bounce off of support at 2020, which is also where the 50 day MA is, so this level is important.  I suspect if this were to break down, any rallies will be capped at around 2040.  If 2020 breaks, 2000 will come soon enough.  If that level there and at 1980 can't hold, its about 100 points down to 1900-1920.  If that fails, it's another 100 or so down to 1820.  This looks like it may give us a nice trade from the short side but it probably needs a little more time to clearly unfold. 

Lets take a quick moment to look at gold which seems like it is trying to do something right now, but no one seems to have informed the gold miners of that.  Gold broke the all important 1180 level last month and dropped down to 1130, as I suspected at the time it's turning out to just be a bear trap that rebounded back above 1200 shortly after.  I realize that it's not over yet, and gold could still fail here and fall lower, but when you have a major break of support like that, if it was going to break sharply lower, it would have done so and not been holding on for a month.  Recently, silver has been outperforming gold, and the GDX has outperformed the GDXJ.  Which is certainly interesting.  Silver out performing gold typically occurs when the metals move into a bullish phase, and the GDX outperforming the GDXJ typically happens then they are moving into a bearish phase.  So, no clear direction in the gold market.  And being that the assets have been headed lower for the last few years, we MUST assume the bears still are in control of this market until it shows us otherwise.  Christmas is not usually a good time for gold.  The low volume typically sees it slide till the end of the year.  I would not be surprised if the metals made a new low before the year ends.  I'm almost 100% sure the miners will.  But I suspect come Jan, things will be very different.  We will have to wait and see.  Here are the charts for the GDX and GDXJ.  

That's all for now guys.  Keep your eyes on oil, which is now 58.02, about to break down further.

****UPDATE**** Oil breaks 58, now 57.36.  Down over 4% today.  We will likely hit 55 Mon or Tues.

-Jonathan M Mergott

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