Wednesday’s dramatic rebound looked like it would continue Thursday before a slide in the closing hour of trading pushed most stocks into the red. The drag from new lows in crude oil couldn’t be overcome. The black stuff fell below the March nadir to close at $42.23, a loss of 2.5%, to return to levels not seen since early 2009.
In the end, the Dow Jones Industrial Average gained a fraction, the S&P 500 lost 0.1%, the Nasdaq Composite lost 0.2% and the Russell 2000 lost 0.3%.
Oil was hit after Genscape data added to the bearish supply glut rationale as a refinery outage in Indiana pushes up inventories. That boosted the ProShares UltraShort Crude Oil (NYSEARCA:SCO) position recommended to Edge subscribers to a total gain of nearly 80% since first recommended on May 26.
Fears over the drag on corporate earnings, inflation and overseas growth from lower energy prices eclipsed initial gains driven by talk from the People’s Bank of China that its currency — which fell for a third consecutive day overnight, bringing its loss to 3% against the dollar this week — didn’t have much reason to fall further. The bank also dismissed talk that Beijing was targeting 10% devaluation.
Still, it’s worth remembering that the PBoC initially described Tuesday’s revaluation as a “one off” move — something that has already been disproved.
The crude oil decline looks set to continue after second-quarter results from exploration and production companies showed plans for a continued pickup in production activity and drilling thanks to efficiency gains and falling well service costs. Bloomberg reported today that some parts of the Bakken shale formation are profitable at less than $30 a barrel.
On the economic front, retail sales came in at a better-than-expected 0.6% monthly rise helped by a 1.4% jump in vehicle sales. Backing up a little, as shown in the chart above, reveals the situation is softer than it appears on the surface. Total sales excluding food services have slowed to levels associated with the start of the last two recessions.
Because gasoline prices (due to the refinery outage) have held up well, up 39% from their January low, this cannot just be dismissed as energy-related. No wonder then that the Atlanta Fed’s GDPNow real-time tracking estimate of Q3 GDP growth is running at just 0.7%.
With so much in play, amid an ongoing deterioration in market breadth heading into the critical “hike/no hike” decision from the Fed on Sept. 17, I continue to recommend defensive positions such as the Aug $30 puts against Hewlett-Packard Company (NYSE:HPQ) that are up 84% for Edge Pro subscribers since August 7.
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.
