Stock Market Today: Market Bliss as Crude Oil Craters

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U.S. equities mostly moved lower on Monday amid relatively quiet trading. The super-tight trading range that’s followed the historic post-Brexit rebound moved into its fourth week as volatility is smashed lower.

But this apparent calm belies the accelerating selloff underway in crude oil, which is down nearly 23% from its high after falling below the $40-a-barrel benchmark for the first time since April. You wouldn’t know it by looking at the sideways skid in large-cap stocks, but oil has entered a new bear market driven by a return of oversupply worries.

In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 Index lost 0.1%, the Nasdaq Composite gained 0.4% and the Russell 2000 ended the day 0.1% lower. Further, Treasury bonds were weaker, the dollar was higher, gold gained 0.2% and oil fell 3.7%.

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Energy stocks led the decliners with a 3.3% loss followed by telecom and materials. Technology stocks put in a strong showing, with “FANG” icon Amazon.com, Inc. (NASDAQ:AMZN) up 1.2%. SolarCity Corp (NASDAQ:SCTY) fell 7.4% as it reached a final deal to be acquired by Tesla Motors Inc (NASDAQ:TSLA) in an all-stock deal with around $2.6 billion. Separately, Trina Solar Limited (ADR) (NYSE:TSL) gained 25.2% after agreeing to be taken private in an all-cash deal worth $1.1 billion.

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The decline in crude was encouraged by a Reuters report that OPEC output likely increased to a record in July and a Bloomberg article that hedge fund bets again energy have increased by the most since at least 2006. Data from Yardeni Research also shows a recent bounce in U.S. drilling rig counts.

As a reminder, recent concern has focused on swollen gasoline inventories, which have pinched refiner margins and slowed cracking activity, which in turn threatens to worsen the glut of crude.

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The weakness in energy stocks appears to just be getting started as shares of stocks like Exxon Mobil Corporation (NYSE:XOM) has badly disconnected from crude oil during the February-July rebound driven by hopes of an OPEC-Russia oil supply freeze deal.

XOM fell through last week’s lows in what looks like a looming test of its 200-day moving average not touched since February. The company reported a top- and bottom-line miss last week, with earnings of 41 cents per share missing expectations for 64 cents on a 22% drop in revenue to $57.7 billion.

Valuations are ridiculous: Consider that XOM’s current trailing twelve-month price-to-earnings ratio is nearly double what is considered fair value.

The decline boosted the Aug $94 XOM puts recommended to Edge Pro subscribers to a gain of 314% since recommended on July 21.

The oversupply is only going to get worse. Libya announced oil ports closed due to civil unrest are to resume exports, Iran is aggressively ramping output now that sanctions have been lifted, Saudi Arabia just cut the price of oil to Asian markets, and Russia’s energy minister said he did not see a coordinated action on curtailing oil output with OPEC.

Also weighing on sentiment were hawkish comments from NY Fed President William Dudley that the futures market was too complacent about the risk of more than one quarter-point interest rate hike by the end of 2017. He reiterated that a hike was possible ahead of the presidential election in November.

All of this threatens the quietest few weeks in the stock market in decades. Yet even within this relative calm, there is evidence of weakness: After a record of nine straight up days the Dow is now down six days straight. That’s the worst result since last August.

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.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/crude-oil-risk-stock-market-today-nyse-dow-jones-industrial-average-investing-news/.

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