Pro-democracy protests in Hong Kong are rattled global markets on Monday, continuing the selling pressure from last week.
Click to Enlarge Asia ex-Japan was down hard, with the iShares MSCI Emerging Markets ETF (EEM) dropping below its 200-day moving average as a result. Beijing has reportedly given local authorities 48 hours to stop the protest — lest they attract attention in the mainland — setting the stage for an outbreak of violence.
But after Europe closed, U.S. markets were able to rally hard and largely trim the day’s losses. In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 lost 0.1%, the Nasdaq Composite lost 0.1%, and the Russell 2000 lost 0.1%.
Utilities led the way higher while energy stocks were hit, with Exxon Mobil (XOM) and Chevron (CVX) among the day’s laggards, finishing down 1% and 0.8%, respectively. This came despite an ongoing bounce in crude oil that pushed it to a three-week high. In response, I recommended my Edge Pro subscribers book profits in their XOM Oct $97.50 puts, which gained 186% since Sept. 4.
This is in response to what looks like some stabilization coming to the sector.
Click to Enlarge For one, much of the recent weakness in crude oil — which has seen West Texas Intermediate Futures drop from $107 a barrel in June to less than $91 a barrel last week — has been driven by the rip-roaring rally in the U.S. dollar. The greenback has punched through long-term trendline resistance going back to 2005, is up 11 weeks in a row, and has only suffered three weekly declines since April.
And two, crude oil has been pushed lower on a combination of typical seasonal factors — such as the end of the summer driving season — as well as a cooling of geopolitical tensions in Ukraine and Iraq.
But this is all changing now.
The U.S. dollar looks vulnerable to a pullback here as it is now massively overextended on a technical basis. And the U.S.-led airstrikes in Syria aren’t going so well amid reports of civilian causalities while Isis militants are allegedly less than two miles from Baghdad. If this keeps up, crude oil could enjoy some buying interest for the first time since late spring.
It’s worth noting that natural gas looks ready to move too as winter weather approaches and Ukraine-Russia gas negotiations remain at an impasse.
As for stocks, it all depends on whether the major averages can continue to ignore the weakness that’s hitting foreign stocks, from Brazil’s Bovespa to Hong Kong’s Hang Seng and Germany’s DAX. Measures of internal market strength remain worrisome: Just 69% of the stocks in the S&P 500 are in uptrends, down from 76% at the start of the month and 85% back in July.
The narrowing base of buying interest, amid growing weakness around the world, bodes ill for U.S. stocks in the days to come.