The S&P 500 faded from its intraday highs on Wednesday to mostly end lower on the day. That was after the index was led higher by energy thanks to an agreement by OPEC to cut and freeze production levels — a positive end to a long and torturous process that was first hinted at back in February.
Many questions remain, including whether promised non-OPEC cuts will come to fruition and how strictly the agreement will enforced. Moreover, some valuations concerns are popping up as well as traders look back at the historic rally enjoyed in November.
In the end, the Dow Jones Industrial Average gained a fraction, the S&P 500 lost 0.3%, the Nasdaq Composite lost 1.1%, and the Russell 2000 lost 0.4%.
Treasury bonds weakened again, pushing interest rate higher and boosting the ProShares UltraShort Lehman 20+ Yr(ETF) (NYSEARCA:TBT) to a 29% gain since recommended to Edge subscribers on Aug. 16. The dollar strengthened, gold lost 1.4%, and oil gained 9.3% on the oil headlines. That lifted the ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) by nearly 17% for Edge subscribers, amid a continued focus on non-equity positions during the post-election rally.
No surprise energy stocks led the way with a 4.8% gain. Yield-sensitives like utilities and telecoms were hit hard on the rise in yields, falling 3.2% and 2.1%, respectively.
GoPro Inc (NASDAQ:GPRO) gained 1.5% after announcing sales of its action cameras from its website were up 33% from last year, a restructuring program that will cut jobs and a goal to return to profitability next year.
Goldman Sachs Group Inc (NYSE:GS) gained 3.6% on an upgrade from analysts at Deutsche Bank.
OPEC Finally Buckles
OPEC announced it will cap output at 32.5 million barrels per day (a 1.2 million cut) in a six-month agreement that starts in January and could be extended another six months in May. They are also seeking a 600,000-barrel-per-day cut from non-OPEC producers, of which about half would come from Russia.
Iranian production will hold at 3.797 million barrels per day, a decrease from the 3.9 million barrels the Iranians were looking for but up slightly from recent levels. Saudi production will be cut nearly 500,000 barrels, representing the bulk of the cuts. Iraqi production will be cut 210 barrels. And Indonesia is “suspending” its membership in OPEC, ostensibly because they didn’t agree to the cuts and any decision by OPEC needs to be unanimous.
OPEC officials claim the 32.5 million barrel cap includes Indonesia’s output, however.
Relief that OPEC was able to come to a decision should help lift energy stocks over the next couple of weeks. Exxon Mobil Corporation (NYSE:XOM) looks like the best way to play this as shares emerge from a multi-month consolidation range, with Edge Pro subscribers holding the $88 Dec calls.
So why, despite the good news from OPEC (well, good for stocks but not for gas-buying consumers) did stocks finish lower?
For one, implementation could be a problem. Compliance with the cap will be monitored by a committee of Kuwait, Venezuela, and Algeria along with two non-OPEC countries. Two, it’s unclear from where Russia’s 300k cut will come (chatter it could be a “cut” from 2017 budget output) and how quickly it will happen. And three, headline risk lingers as OPEC and non-OPEC producers plan to meet in early December to discuss the freeze agreement.
I believe these fears will pass quickly, given favorable seasonality and rotation out of bond and bond-like stocks, as we head into the Christmas holiday and the Federal Reserve’s next policy meeting.