U.S. equities finished out a volatile month with a quiet decline on Monday with the bulk of the attention going to crude oil, which is in the middle of a dramatic rebound.
While Beijing is claiming otherwise, Chinese stocks benefited from what looked like another official intervention heading into the closing bell on chatter the communists are aggressively leaning against volatility heading into an upcoming military parade.
In the, end the Dow Jones Industrial Average lost 0.7%, the S&P 500 lost 0.8%, the Nasdaq Composite lost 1.1%, and the Russell 2000 lost 0.3%.
In fact, August gave stocks their worst monthly performance in more than three years: The Dow dropped 6.6%, a decline not seen since May 2010. The S&P 500 fell 6.3% while the Nasdaq lost 6.9% — both of which were the worst performances since May 2012.
Thanks to leveraged long best on volatility, the Edge portfolio finished the month with an 82% gain, driven by a 120% gain in the VelocityShares 2x VIX (TVIX) and a 29.4% gain in the ProShares UltraShort Crude Oil (SCO).
The weak finish was driven by over-the-weekend comments from Federal Reserve Vice Chairman Stanley Fischer that a September rate hike was still on the table despite recent market turmoil. There have also been reports that global central bankers are telling the Fed — despite warnings from the Chinese media — that they are ready for rate liftoff and would prefer it happened sooner rather than later.
At the sector level, energy stocks led the way with a 1.1% gain thanks to a 7.3% rise in crude oil. Twitter (TWTR) gained 3.6% on an analyst upgrade while Netflix (NFLX) dropped 2.2% on the loss of the content deal with Epix.
Crude oil has enjoyed an epic reversal, with the West Texas Intermediate variety rallying from a low of $37.75 (during last week’s market volatility) to top the $49-per-barrel level on Monday — a rebound of nearly 33% — in what looks like a prototypical short-covering surge.
Since falling out of a multi-month trading range in late June, oil had suffered a 39% decline on a combination of supply side and demand side issues. On the supply side, the ongoing price war between U.S. shale producers and Saudi Arabia as well as elevated inventories were the drivers. On the demand side, the approach of the end of the peak summer driving season, concerns over China, and refinery outages were to blame.
Is the rebound of the past week a sign the fundamentals are starting to change? Or is this another price rebound to fade?
Monday’s 11%-plus intra-day swing — fueling the biggest bounce since 1990 — was spurred by reports that OPEC officials are growing concerned about continuing price pressure — which they blame on higher production and market speculation — and worry that future investment will be slowed by lower prices. They claim to be prepared to talk with all crude producers about the market situation as long as talks take place “on a level playing field.”
According to Citigroup analysts, this is a move to fade. There are three reasons why.
For one, the OPEC headline in their judgement was a “gross misrepresentation” of the cartel’s bulletin statement. With nearly all OPEC officials still on holiday along with a lack of further reporting on any actual policy change, they suggest nothing substantive has happened in Riyadh.
Two, OPEC would be the losers in any unilateral production cut. The U.S. rig count increase in Q3, after the oil price bounce of Q2, shows the resiliency of the American shale oil patch with talent and equipment still in place.
And three, OPEC has an internal problem with more than 1.5 million barrels per day of incremental supply due to come online over the next 15 months from Iran and Iraq.
Still, the bond market is taking the possible lift to inflation from higher energy prices seriously, pushing the iShares 20+ Year Treasury Bond (TLT) down 0.8% — forcing yields higher — in what looks like the start of the first medium-term breakdown since April. Also lifting yields has been reports Chinese authorities are selling T-bond holdings to raise dollars needed to stabilize their currency.
Edge Pro subscribers are ready to profit from the move with September $122 TLT put option positions.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
