Are Energy Stocks And Banks Cracking?

As technology stocks continue to tick up to new record highs, banks and even more so energy stocks are showing signs of weakness. Yesterday, the Nasdaq (chart) hit an all time high of 6221.99 and the S&P 500 (chart) also notched a record recently at 2418.71. That said, the energy sector has lost almost 10 percent in the last month or so and the banking sector is beginning to technically breakdown. A very noticeable divergence is happening here and I think it is time to pay attention to this recent dynamic. The Dow Jones Industrial Average (chart) remains above 21000 and the small-cap Russell 2000 (chart) is seeking direction.

I am not surprised that certain sectors of the market are showing weakness which is only normal with the tremendous run the markets have had since the election, however, it is the sectors that are breaking down that is a bit alarming to me. One has to ask is the price action in oil and energy stocks indicative of weakening demand hence a weakening economy? Or is this just a matter of too much supply in oil regardless of the O.P.E.C. commitment to its production cuts. As far as the banks are concerned, one would also think with the Federal Reserve raising interest rates at their upcoming meeting in June and committing to additional rate hikes this year. that this would be bullish for bank stocks. Not the case recently. I am a little perplexed to the way the tape has been acting as of late especially pertaining to the aforementioned sectors.

The technical shape of the key indices appear to be intact with the exception of the small-cap Russell 2000. The Dow Jones Industrial Average (chart) is trading well above its 50-day moving average, along with the S&P 500 (chart)  trading near all-time highs and the Nasdaq (chart) as mentioned above hit an all-time high yesterday. However, the small-cap Russell 2000 (chart) is trading below its 50-day moving average and has been challenging certain support zones lately. This is yet another potential alarm along with the energy and banking sector weakness lately. So I would not be surprised to see the selling pressure in these particular sectors continue in the month of June which is historically one of the weakest month of the year for stocks. Good luck to all 🙂

~George

OPEC Adds Fuel To The Rally!

For the first time since 2008 the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut output sending oil prices and oil stocks soaring. Oil (see chart below) had one of its best days in years soaring over 10% which helped propel the Dow Jones Industrial Average (chart) and the S&P 500 (chart) to set yet another record high yesterday before a late day sell-off. Nonetheless, stocks have been on fire since Donald Trump won the election. Seemingly every sector other than the gold sector is overbought. All you have to do is look at the financial sector Symbol: XLF (chart), the materials sector Symbol: XLB (chart), the industrials sector Symbol: XLI (chart) and the energy sector Symbol: XLE (chart) to see how overbought this market is. That said, stocks and or indexes can remain overbought or oversold for that matter for extended periods of time. Add into the mix Trump’s pledge to spend over $1 trillion on infrastructure here in the U.S. and the pledge to cut corporate and capital gains taxes and why would anyone think this rally could not continue?

It is easy to get caught up in the current euphoria of this breathtaking rally in the stock market and the promises of the incoming administration. However, let’s not forget what has been promised has to actually occur and if there is any back peddling by the new administration, the markets could react just as aggressively to the downside as they have to the upside. I am not suggesting that this will happen but we have all seen politicians make promises before they are elected only to change their tune after they take their respective seats. Which is why I do my best to tune out the noise and focus on overbought and oversold conditions. And this is where we find ourselves today. A very overbought market that I would expect will revert to the mean at some point in time.

Good luck to all 🙂

~George

oil chart George Mahfouz Jr

OPEC Doesn’t Budge, Oil And The Energy Sector Tumble!

The Organization of the Petroleum Exporting Countries decided on Thursday not to cut production as many had hoped. This decision sent crude oil and energy stocks tumbling. The overall energy sector fell over six percent on Friday while U.S. crude fell to $66.36 per barrel, a level not seen in over four years. On the bright side however, lower oil prices will ultimately pass through to the consumer, which should be a positive for the overall economy. This may be the reason why the markets in general didn’t see too much pressure last week. For the week, the Dow Jones Industrial Average (chart), the S&P 500 (chart), and the small-cap Russell 2000 (chart) closed essentially unchanged, while the Nasdaq (chart) posted a strong weekly gain of 1.7%.

Friday’s trading session closed early due to the Thanksgiving holiday, so I will be very interested to see how crude oil and the energy sector trades this week as market participants get back to work and normal volumes resume. That said, I am expecting more downward pressure on oil and energy stocks in the near term. Without question the smaller, leveraged and debt-ridden oil and gas companies are in a precarious position, especially those in the exploration stages. These companies may be forced into consolidation or have no choice but to fire-sale part of their asset base in order to reduce debt levels. What I will be looking for in the coming weeks are large and mega-cap energy companies that have had their stock hit, and that have rock solid balance sheets that can weather the storm in this environment.

Despite the volatility the markets have experienced here in the fourth quarter and with crude oil falling sharply, three of the four major averages are still up impressively on the year, with the small-cap Russell 2000 (chart) basically flat. Now that we are in the month of December, I do not see any real headwinds as we close out 2014. In fact, with lower oil, the consumer may be a bit more cheerful as the Christmas holiday season fast approaches. If this is the case, stocks as a whole could end the year on their highs. Have a great week 🙂

~George