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Dow Jones Drops on Crude Concerns

Stocks dropped again on Wednesday in light pre-holiday trading as inventory concerns pummeled crude oil.

In the end, the Dow Jones Industrial Average lost 0.7%, the S&P 500 lost 0.7%, the Nasdaq Composite lost 0.8% and the Russell 2000 lost 0.9%. The strengthening dollar didn’t help things on the oil front, nor on the gold front, with the yellow metal on the decline.

Crude oil lost 2.9% to close at $36.76 a barrel after American Petroleum Institute inventory data released Tuesday afternoon showed a stockpile build of 2.9 million barrels, far ahead of expectations. Today’s Energy Information Administration numbers showed a 2.6-million-barrel build vs. a drop of 5.9 million barrels last week.

OECD oil

Adding additional pressure were comments from Saudi Arabia’s energy minister that his country’s oil output strategy is “reliable” and won’t be changed.

Other wrinkles include rising U.S. oil production and the fact that global crude storage is quickly approaching capacity. Seasonally, stockpiles tend to drop at the end of the year and rise in the first few weeks of the New Year due to tax implications. A repeat in early 2016 could well push crude oil to fresh lows not seen since the early 2000s.

A tank topping in various areas of the energy market is looking increasingly likely heading into 2016. In a recent note to clients, Goldman Sachs said avoiding inventory top-out would require a slowdown of production, due to producer financial stress and the shutting of funding for producers with oil near $40. But that’s just not happening.

Their warning: Oil may need to fall to cash costs near $20 a barrel to force production cuts.

No surprise, then, that energy stocks led the decliners with a 1.5% decline, followed by materials, which were down 1%. Apparel stocks were soft within discretionary stocks. Semiconductors were a drag on tech overall. Defensive utility stocks led the way, limiting their decline to 0.2%.

Technically, lots of focus remains on whether large-caps stocks will put in a negative annual performance for 2015.

As things stand now, the S&P 500 is up 0.2% for the year to date while the Dow Jones is down 1.2% and remains constrained by a resistance pattern of lower higher going back to May. The psychologically important 18,000 level hasn’t been crossed since July. And measures of market breadth — or how many stocks are participating to the upside — have been deteriorating for months.

S&P 500 bullish

As I’ve been saying for weeks, seasonal strength (the “Santa” effect) and light volumes has kept a lid on stock and bond market volatility recently. But heading into the second week of January, junk bond risks, stalled corporate earnings, slowing U.S. economic growth, weak oil prices, and the specter of another four Federal Reserve interest rates hikes (based on their forecasts) should spook investors into a fresh bout of selling.

In response, I’m recommending defensive positions to my clients, such as the Jan $110 puts against Apple Inc. (AAPL), which are carrying a 23% gain for Edge Pro subscribers.

Apple IncAnthony 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.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/dow-jones-drops-on-crude-concerns/.

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