The going carnage in crude oil has crushed stocks lower on Wednesday ahead of the release of the latest Federal Reserve minutes. The release of the minutes was the cause of some excitement after Bloomberg violated the embargo and reported on the contents early.
The takeaway was considered dovish, with the Fed worried about downside risks to its economic outlook, risks associated with tightening too soon and evidence that inflation will remain low. As a result, the futures market pushed back its expectation of the first rate hike since 2006 from September to December.
In the end, the Dow Jones Industrial Average lost 0.9%, the S&P 500 Index lost 0.8%, the Nasdaq Composite lost 0.8% and the Russell 2000 lost 1%.
The black stuff traded below $41 a barrel for the first time since 2009 this morning, and looks set to break below the $40 a barrel level soon (Citigroup analysts are calling for a return to a $32 handle) on oversupply concerns and the specter of Iranian oil returning to the market. Crude closed with a 5% loss.
What started Wednesday’s selling was a larger than expected Department of Energy inventories report showing a 2.6 million barrel add when a 1 million barrel withdrawal was expected. This was the largest inventory build in four months, and comes despite a production slowdown for the third week in the last four. A refinery shutdown is being fingered for much of the blame.
Another dynamic at work is the impression that Saudi Arabia is ramping up production to redouble its effort to recapture market share from U.S. shale producers. Imports increased 6.1% for the week, which supports this theory.
As a result, the ProShares UltraShort Crude Oil (SCO), recommended to Edge subscribers, gained another 8.6% to bring its total gain to 95.3% since it was first added on May 26.
No surprise then that energy stocks led the decline with a 2.8% loss followed by materials. Utilities were the lone sector in the green, with a 0.4% gain.
This is it.
After months in the doldrums, the S&P 500 finally looks set to break down and out of trading range that has been in place since late last year. The critical level is the 200-day moving average, which the bulls have been vigorously defending since late June.
This masked deeper woes in individual stocks, which happens to be something I’ve been hammering about for months. Just 48% of the stocks in the S&P 500 are actually in uptrends — a sign the bulls have been relying on a narrowing base of support to hold the 200-day average.
The playbook that we’ve seen over the last few years is that whenever global markets are at risk, the major central banks zoom in with more policy stimulus. And indeed, after the release of the Fed minutes today, stocks zoomed back into positive territory for a moment before the sellers reappeared. Along with the persistent selloff in China, despite aggressive efforts by policymakers to stem the tide, we could be in the midst of a sea change. Investors could be realizing that more cheap money stimulus isn’t going to work this time.
Indeed, a recent research paper from the St. Louis Federal Reserve Bank finds that after six years of quantitative easing that swelled the Fed’s balance sheet to $4.5 trillion, the policy “has been ineffective in increasing inflation” and only seems to have boosted stock prices. Moreover, the policy could’ve very well driven the inequality gap noted by so many.
The ongoing pressure on China and the energy sector, with knock-on impacts on corporate earnings, doesn’t look like it’s going anywhere either.
No wonder then that investors are flooding into safe haven assets like Treasury bonds and gold. The iShares 20+ Year Treasury Bond (TLT) gained 1% while the Gold Trust SPDR (GLD) added 1.3%. That boosted the August $105 GLD calls, recommended to Edge Pro subscribers ,to a gain of nearly 200% since they were added on Aug. 3.
Individual gold stocks are on the move too — one of the few areas in the market looking good for new money — with Kinross Gold (KGC) up 22% since recommended to Edge subscribers on Aug. 3.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
