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Week Ahead: Holiday-Thin Stock Trading Could Focus on Financials, Oil

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December 28, 2015

Stocks twisted between gains and losses in the lead-up to the Christmas break, a pattern that may repeat in coming days. 

Holiday trading could remain thin, yet prone to high-volume spurts, in the time between Christmas and the end of the year. The seasonal “Santa Rally” has been on hiatus this year, leading to largely choppy action with little clear sign of what’s next. A relatively light data week is on tap, while financial markets are closed on Friday, January 1, for the New Year’s holiday (see the full economic calendar below).

The S&P 500 (SPX) was confined between 2075 and significant downside support at 2,000 so far in late December. These areas could be important markers for a largely range-bound trade that leaves the SPX down fractionally year to date heading into the final week of 2015 trading (figure 1).

Energy and financial shares have been among the more significant movers of late and their trend could continue to influence the broader market’s near-term course.

SPX stock index

FIGURE 1: PLENTY OF RED AND GREEN.

The S&P 500 (SPX), plotted here on the thinkorswim® platform through early last week remained largely range-bound in the holiday-shortened trading week. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Interest Rate Sensitivity

Financial shares are among the stock sectors most sensitive to Federal Reserve interest rate decisions. The Fed, of course, broke the seal on the first interest rate hike in nearly a decade this month, opening the door to a new round of speculation for how far and how fast the Fed might move from here.

Industry analysts said pre-Christmas financial shares weakness was due in part to spotty housing and GDP readings, which boosted some expectations for a slower path to “normal” interest rates at the Fed. Banks, of course, tend to benefit from higher interest rates.

With this in mind, the next few weeks of economic reports could prove increasingly market-sensitive as the Fed resumes a 2016 meeting schedule that includes a rate decision in January and March.

Figuring Out Oil

Crude oil pricing—and that market’s hold over energy shares—could continue to impact the broader stock market. Investors have new developments in the oil market to consider.

The U.S. oil benchmark, West Texas Intermediate (WTI), traded at $36.36. That’s parity with its global counterpart on December 22 for the first time since January. In fact, WTI briefly traded at a premium of a few pennies to Brent. The alignment was driven in part when the U.S. lifted a four-decade ban on U.S. oil exports. Industry analysts also noted increased production of Brent crude in the North Sea.

Industry analysts were quick to remind us that the fundamental picture is little changed. Concerns about substantial oil oversupply amid a slower-than-expected drop in shale production in the U.S., free-flowing output by OPEC, and the prospect of renewed exports by Iran are expected to keep a lid on oil prices into the new year. Crude inventories data hits on December 30 and this report could carry increasing significance for the stock market.

Good Trading,

JJ

@TDAJJKinahan

economic report calendar

FIGURE 2: ECONOMIC AGENDA.

This week’s U.S. economic report calendar. Source: Briefing.com.

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