Stocks retreated on Monday in relatively quiet, orderly trading that lacked a specific catalyst. It was just as though holders were satisfied with what they had, and there were not enough motivated new buyers to counteract the complacency.
We have seen this countless times in the past year, as it is a very common feature of trading when indexes are at or near all-time highs. It does not have any hidden meaning. It was a rest day — though, to be sure, a pretty deep one, as the S&P 500 recorded its steepest setback since Oct. 22.
If there was one factor weighing on sentiment, it was crude oil, whose spot price in Texas was obliterated again, sinking 4.2% to a five-year low around $63 per barrel. The head of Kuwait’s state oil company said on Monday that oil prices are likely to remain around $65 per barrel for the next six months. I guess we’ll see how good a forecaster he is soon enough, though we must keep in mind that he could be deliberately head-faking.
Brokers added to downward pressure, as a number of recent reports have cut oil price forecasts. Morgan Stanley (MS) cut its price outlook, citing oversupply; the firm’s worst-case scenario has oil falling as low as $43 by the second quarter next year.
The bad news is that the lower oil prices are clobbering the shares of some of the biggest stocks in the U.S. market-cap-weighted indexes, including Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM). Counterbalancing that has been consumer stocks, which have seen increased interest due to the fact that household finances will improve on lower gasoline prices. Morgan Stanley estimates that the recent drop could provide an extra $40 billion for consumers in the fourth quarter alone.
Also providing some grist for the mills was the Friday data showing better-than-expected November employment. It generated speculation about the monetary policy “normalization process,” otherwise known as interest-rate hikes.
Some experts expect that the recent data will induce the Fed to remove the “considerable time” language from guidance at its Dec. 17 meeting. But Atlanta Fed President Dennis Lockhart, a non-voting member, stated today that he was “not in a rush to drop” the considerable time language. His concern is that dropping the phrase would be taken as a signal of an imminent rate hike. Lockhart also stated that the committee can consider beginning to normalize rates in mid-2015 or later.
Looking forward, I suspect that Monday’s setback is not the start of some big unraveling of recent market gains. Even if the S&P 500 were to pull all the way back to the 2,000 level, my expectation is that it would just be setting up a very robust rally for the start of next year. As a result, I expect to continue to focus my trading on the long side.
The Pentagon contractors and aerospace manufacturers are among the best groups in the market now, so today I’m recommending one of these stocks.
Rockwell Collins, Inc. (COL) is a major defense contractor specializing in avionics for jet aircraft. Shares have been flat-lining for the past five months but should get going soon. Buy COL for target $88.60, and set a stop at $83.50, good after 11:00 a.m. ET only.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
