Wall Street remains in a strange sort of suspended animation, with the major averages at the top of multimonth trading ranges as the Dow Jones Industrial Average flirts with the 18,000 level as the S&P 500 teases near 2,100. Trading has been choppy. Volumes light. And breadth narrow.
On Thursday, stocks largely moved lower in response to a German rejection of a Greek loan extension proposal (basically, it was “give us money for nothing,” so the decision wasn’t surprising) as well as ongoing deterioration in the U.S. economic data.
In the end, the Dow lost 0.2% while the S&P 500 lost 0.1%. The Nasdaq Composite gained 0.4% thanks to a 3.5% gain in Facebook Inc (NASDAQ:FB). Small caps were unchanged.
Crude oil gained 1.4% to close at $51.16 after trading down to its 20-day moving average in the low $49s. The whipsaw came amid a big build in crude inventories and production, which despite the excitement over the drop in drilling rig counts suggests prices have more downside from here.
The U.S. Energy Information Administration reported that crude inventories rose for the sixth straight week, up 7.7 million barrels to the fourth straight 80-year high of 425.6 million barrels. Over the last six weeks, crude inventories have risen at the fastest pace in 14 years and the second fastest pace in history.
With onshore facilities bursting at the seams, we’re at the point that the cost and availability of floating storage is coming into play as hedge fund types buy and store cash oil to sell forward — capturing the “contango” profits. Once the floating storage play is maxed out, all that extra crude will hit the cash market, push prices down in a big way, and potentially pull down futures prices as well.
Technically, this is the third bounce off of the 20-day moving average for West Texas Intermediate out of its January low — any violation could unleash a torrent of fresh selling pressure.
Focus remains on the ongoing bickering between Greece and the European establishment, which rejected Athens’ six-month loan extension proposal. Still, investors seem to be betting that a deal gets done over the weekend with Greek banks closed on Monday for a holiday.
Here at home, the Philly Fed manufacturing activity index fell to its lowest level in a year at 5.2 in February from 6.3 in January. The consensus expectation was for 8.5.
As a result, the Citigroup Economic Surprise Index has dropped to its 2014 lows — any further deterioration will represent the largest run of disappointing data vs. analyst expectations since 2012. Historically, the index and the stock market have been correlated with each other. But since the flood of stimulus in late 2012, stocks just don’t seem to care about the fundamentals anymore.
In addition to the economic data, forward earnings expectations are dropping fast, factory orders are dropping, valuations are extended, and we remain on the cusp of the first interest rate hike from the Fed since 2006. That, along with the not insignificant risk that Greece exits the euro, suggests that stocks are looking pretty toppy here.
I think renewed weakness in crude oil will likely force stocks down off of their perch, setting up a retest of the lows of the recent multimonth trading channel. In response, I’ve recommended the ProShares UltraShort Crude Oil (NYSEARCA:SCO) to my Edge subscribers.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
