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Oil’s Grip on Stock Market Not Letting Up

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January 13, 2015

The two drivers behind stock sentiment early Tuesday are macro factors—Europe’s hope for policy help to remedy a weak economy and oil’s continued slide. Focus on the big picture leaves U.S. stocks little changed in early action, while earnings season quietly kicks off dwarfed for now by these bigger issues. The correlation between the oil market and the S&P 500 (SPX) continues, evident in a Monday selloff triggered in part by Goldman Sachs’ fresh haircut for its oil prediction (see figure 1).

Watch for SPX to bounce between support at 2020 and resistance at 2050. Watch for volatility, as measured by the CBOE Volatility Index (VIX), to hold at higher levels that in reality are simply closer to historical norms, a reversion to the mean, if you will. Finally, watch the continued downside pressure on market interest rates as some funds and institutional investors continue to store money in fixed income, apparently not fully convinced that the stock market can weather the oil storm.

FIGURE 1: U.S.-traded light sweet crude futures shown on TD Ameritrade’s thinkorswim® platform closed near $45 a barrel Monday and poked below that price overnight and early Tuesday. Data source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

Bad is Good. Good is Bad. European stock markets are trading in that alternate universe where bad news draws cheers. That’s because weak economic results are seen giving the European Central Bank (ECB) the cover it might need to pump more money into the system there. Wholesale prices fell in Germany and retail prices dropped in Greece in reports out Tuesday, sending Europe’s major stock averages higher (yes, higher) and spilling over to help underpin U.S. stocks. This “bad news” trend could continue leading up to the ECB’s January 22 policy meeting.

Data Jolt? Make that JOLTS—the off-off-off Broadway report that’s found its way onto the stock market’s economic marquee. JOLTS stands for the Job Openings and Labor Turnover Survey from the Labor Department. It’s due for release this morning at 10 a.m. Eastern. JOLTS has been around for a while but was given little attention until a few months ago when the Federal Reserve said it likes this report. It likes it a lot, in fact, as job market churn offers important signs for a strengthening/weakening labor situation.

Shiny Outlook From Alcoa. If the broader market can tear itself away from the big picture, a little report out late Monday carried a pretty bullish message. Alcoa (AA) unofficially kicked off the latest round of earnings reports, beating with top- and bottom-line results and sending its shares higher in early action. Perhaps more important is what the aluminum maker had to say about the industries it serves. Demand for commercial and regional jets will help boost global aerospace sales as much as 10% in 2015, the company said. It also predicted U.S. auto sales will jump 5.8% in 2015. 

Good trading,
JJ
@TDAJJKinahan

NC
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