S&P 500 Loses 2000 as Crude Reversal Fails to Hold

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Overnight, it looked like the bulls were about to enjoy some relief from the selling. Crude oil rebounded during the Asian and European trading sessions, helping lift U.S. equity futures in the overnight session. And as the cash session opened in New York, stocks initially zipped higher.

… Before the sellers hit the bounce hard.

In the end, the S&P 500 lost 0.6% as it fell through the 2000 level and lost the support at the 50-day moving average the stemmed the tide on Friday. With that, the 200-day moving average comes into play around 1950. The Dow Jones Industrial Average didn’t fare much better, dropping 0.6%, while the Russell 2000 small-cap index lost 1%.

S&P 500

Crude oil continued its free fall dropping another 2.8% to close at $55.91 as Wall Street analysts do the math and realize that, unless OPEC changes its mind and cuts production (and thus, losing market share to U.S. shale producers) it’s going to take months for any slowdown in American production to stabilize prices.

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And OPEC doesn’t look like it’s in any hurry to do anything: United Arab Emirates energy minister Suhail Al-Mazrouei said that a drop in oil prices to $40 a barrel still wouldn’t generate a production cut, while OPEC chief Abdullah al-Badri said the cartel could handle the price drop and would keep output unchanged.

Another dynamic is that when oil prices rise dramatically, the White House normally threatens a release from the strategic reserves. But on the way down, there is just no political impetus to get in the way despite the shockwaves it’s sending through the financial markets.

Relief could come as soon as Wednesday when the Federal Reserve’s policy announcement likely will mention the downside risks to inflation from the dramatic fall in crude — thereby pushing back the timing of rate hikes, bolstering the dollar and lifting commodity prices generally. If done diplomatically, they probably can avoid being labeled as in favor of higher gasoline prices (which they are, but just won’t say out loud).

As a reminder, the markets are unnerved by crude oil’s fall — despite the obvious positives for consumer spending — because of the impact it will have on the junk bond market (due to exposure to high-cost shale producers at risk of default), corporate profit growth, and economic growth via lower investment spending and energy-sector hiring.

At the sector level, financial stocks are getting pulled into the selling on concerns that loan growth could be pinched by a slowdown in the U.S. energy industry as credit costs rise from increased defaults and restructurings. The Financials SPDR (XLF) dropped 0.9% as it returned to levels not seen since early November.

I’ve been waiting for this. The Jan $55 Citigroup (C) puts recommended to Edge Pro subscribers last week are up nearly 100%, while the $82 Bank of America (BAC) puts are up nearly 82%.

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But ahead of the Fed’s announcement on Wednesday, I’m looking at booking profits and moving to cash. I’d rather watch the volatility that will be unleashed from the sidelines.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/sp-500-loses-2000-crude-oil/.

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