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Drilling Into Recent Close Correlation Between Oil, Equities: Can it Last?

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October 20, 2016

(Thursday Market Open) The question Thursday is, will the stock market track crude oil, as it’s done over the last week; or trade independently from crude, the longer-term pattern? Early on, both crude oil and S&P 500 futures were lower.

Over the last five days, crude and E-mini S&P 500 futures have displayed a sky-high 96% correlation. That’s in contrast to the last 60 days, in which the two had a negative-16 correlation. It could be interesting to watch in coming days if the strong recent correlation continues, or if crude and the S&P 500 index go back to trading as they did earlier this fall. We’ll see if the stock market continues to take its direction from crude, as it did so often last winter.

Overseas central banks are back in the news, as the European Central Bank (ECB) met Thursday and kept interest rates unchanged. That was in line with analysts’ expectations going into the meeting. Investors might want to watch to see what ECB President Mario Draghi, who speaks today, has to say about the future of the ECB’s bond-buying program. Inflation in Europe has recently gained a little steam, perhaps a sign that stimulus is having an effect. The ECB said Thursday that it expects rates “to remain at present or lower levels for an extended period of time.” It confirmed that its large-scale asset purchase program is planned to “run until the end of March 2017, or beyond, if necessary,” media reports said.

The earnings parade continued Wednesday night and early Thursday, with reports from companies including Verizon (VZ), American Airlines (AAL), and eBay (EBAY), among others. Shares of VZ and EBAY fell after they reported, as investors digested VZ’s somewhat lighter-than-expected revenue and an outlook from EBAY that didn’t reach analysts’ consensus predictions, media reports said. Microsoft (MSFT) is one of the big companies reporting today after the close.

There was another hawkish Fed speech last night, as New York Fed President William Dudley predicted a rate hike if the economy continues to perform as it has recently. "If the economy stays on its current trajectory I think ... we'll see an interest rate hike later this year," Dudley told a dinner gathering, Reuters reported.

Amid the earnings deluge, data from the government Wednesday suggested the housing market remains strong. Single-family housing starts, which account for the largest share of the residential housing market, jumped 8.1 percent to a 783,000-unit pace in September. That was the highest level since February

October is often a volatile month, historical data show, and presidential elections also typically create some choppiness. The CBOE’s VIX futures remain up from September, but don’t reflect a market that’s too nervous, at least by historic standards. The VIX stood at 14.21 early Thursday, down from highs above 17 earlier this week and below the long-term average.

S&P 500

FIGURE 1: CAN SPX PIERCE 2150?

The S&P 500 (SPX), plotted through Wednesday on the TD Ameritrade thinkorswim® platform, rose for the second-straight day but didn’t hit the psychologically important 2150 level, which the SPX hasn’t topped since Oct. 11. Support remains at 2128 Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

M-Words Again Dominate Beige Book: A couple of months ago, we noted the prevalence of “M” words in the Fed’s Beige Book release. Nothing has changed with the most recent Beige Book, released Wednesday, which reported some economic expansion around the country. The key words, once again, were “moderate,” “mixed,” and “modest.” Most Districts indicated a “modest or moderate pace of expansion,” the Fed said. Manufacturing activity was “mixed.” Outlook for retail spending in coming months is “modest” in most regions. Employment expanded at a “modest” pace. There were some spots where the Fed veered slightly away from the vanilla language, noting some tightness in the labor market, for instance. Nevertheless, wage growth remained “modest,” and price growth is “mild.”

Crude Oil Keeps On Flowing…Away: Though U.S. crude oil stockpiles remain near the upper limit of the average range for this time of year, inventories dropped by 5.2 million barrels during the week ended Oct. 14, the U.S. Energy Information Administration (EIA) said Wednesday. The news initially boosted crude oil futures to new one-year highs above $51 a barrel. The steady dribble of oil out of storage seems to defy historic precedent during what typically is a supply-building season, and may be boosting the energy sector, which roared to better than 1% gains Wednesday after the report. Halliburton (HAL), which reported stronger than expected results this week, said it expects an increased commodity price to raise rig counts in North America. “Things are getting better for us and our customers,” HAL noted in its earnings release. Schlumberger (SLB), another big energy company, reports after Thursday’s close. Oil prices fell slightly early Thursday.

Want Fries with that Light Bulb? McDonald’s and GE Earnings Ahead: Friday morning could be interesting for investors who follow two U.S. stalwarts: McDonald’s (MCD) and General Electric (GE), both of which report before the open. Each comes into Friday with their stocks displaying signs of weakness, as MCD recently fell to a new low for the year and is down more than 5% year to date. GE is down about 7% year to date. The focus going into MCD earnings is partly on how it’s handling the so-called “restaurant recession,” or even if such a recession exists. Stay tuned to hear what MCD executives say about that in their earnings call. MCD is expected to report EPS of $1.48, according to Briefing.com, up from $1.40 a year ago. GE, a huge company whose product performance can help investors get a better worldview into the broader economy, is expected to report EPS of 30 cents, down from 32 cents a year ago, Briefing.com said. Investors may want to monitor GE’s guidance to see if it’s affected by some challenges to GE’s core businesses.

Good Trading,
JJ
@TDAJJKinahan

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