Market Update – Chart and market analysis; Oil, gold, stocks, bonds, and investment sentiment

Note: Click all charts to enlarge

Oil

I want to point out why I was bearish on oil this past weekend. I mentioned on Sunday’s podcast that a test of the 100-week mva was imminent ($59.80). Oil not only didn’t hold the 50-week mva, but it failed miserably at the 100-week test.

Once again, the XOP ETF technical failure foretold of oil’s upcoming drop. Now that the United States is the largest oil producer, the movement of the XOP often telegraphs future WTI market action. In this case, it was down.

-XOP closed down at $27.10, down 5.7% today. Even with oil at a lower price, the technical damage is severe. The XOP is telling me that more pain is coming.
-A poorly performing XOP does not mean that shale oil is a passing fad. Quite the contrary. Most of the shale oil E&P’s should not be in business. Many have excellent assets, but poor controls and high costs of capital. Their assets will be bought by the largest producers (e.g. CVX, XOM) for low prices.
-OXY paid too high a price for APC. CVX did the right thing to walk away. Based on the XOP’s price action, there will be plenty of opportunities for the largest players to piece together excellent property portfolios for cheaper prices. Patience will win.
-The shale region is the only place in the world where small producers can drill and extract oil profitably. Most regions around the world are already controlled by the largest vertically-integrated firms. This will be the case in the shale fields as well where low cost of capital is key.

The XOP telegraphed the oil movement this week. It also proved accurate in predicting last year’s swoon as well

Gold

Gold hovers at the 100 week mva, while silver (the line, left axis) plumbs further depths. Given the global situation, gold should be above 1,300.

-While gold has moved up this week, if we consider the current circumstances, its movement has been very feeble. Given the higher than average Large-Spec. net-long COT position, any good news could send the price tumbling below support. I have to believe that tomorrow’s COT report will be even more stretched.
-Gold needs to move above $1,300 immediately or else it risks breaking down to the 50-week mva on any good news.
-Silver keeps lagging as well as platinum (below).

Platinum looks especially weak, like silver. It briefly broke below 800 again today. Gold is defying gravity.

Stocks

Despite all that is going on, the S&P 500 futures look to be holding support for now

-The Fed has tried to temper the market’s enthusiasm for a Fed funds rate cut, and still stocks remain elevated.
-The Dow futures are clinging to the 50-week mva, while the Nasdaq futures are still above it.

Bonds

The 10-year UST yield is breaking through support. Bond prices continue to move higher above resistance.

-As predicted, the UST longer-dated yields continue to fall. Though the Fed is pretending to sound hawkish, the trading community already has other ideas.
-I have to believe the Fed will continue to be dovish, especially if the trade situation heats up.
-It is impossible to be bearish on any asset class under this situation. If you are scared, just sit in cash. The equity market sentiment is very bearish and bearishness is at very high levels.

Bullish sentiment continues to sink lower

Trade headlines have continued to have a negative impact on stock prices, and in turn sentiment levels, over the past week. The AAII investor sentiment survey saw bullish sentiment decline sharply once again this week falling to 24.71% compared to 29.82% last week. To think that just two weeks ago bullish sentiment was at 43.12%, which was the highest reading of the year. Falling 18.41% from this recent high, the current decline is the largest two-week drop in bullish sentiment since 6/6/13 when it fell 19.5% over the two previous weeks.

Bullish sentiment is near the historic low range.

This week’s reading of 24.71% is well below the historical average of 38.21%. In fact, it is over 1 standard deviation below it, something that can be considered a bit extreme and raising expectations for some type of mean reversion. When bullish sentiment reaches an extreme low by historical standards, forward equity market performance has typically been stronger than average. The last time survey respondents showed this little optimism was in late December of last year; right around the time of the market bottom.

We will see….