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Thanksgiving drift

By David Morrison  |  22/11/2018 16:00
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The usual Thanksgiving rally has failed to materialise. Meanwhile, crude oil continues to hover around 13-month lows

There will be some disappointment, not to say distinct nervousness, as US stock indices failed to rally into the Thanksgiving holiday. It’s usual to see gains, however modest, for the major indices over this holiday week, particularly as it ends with the much-hyped Black Friday sales. But going into this week we heard a clutch of disappointing news from the main US ‘bricks and mortar’ retailers. On Tuesday the share prices of Kohl’s, Lowe’s, Target and L Brands all fell sharply on a mixture of disappointing forward guidance, comparable store sales, dividend cuts or misses to earnings and/or revenues. Meanwhile, retail giant Walmart continued to slide after reporting lower-than-expected revenues on Monday. The stock has closed lower for eight consecutive sessions, having lost over 10% since 12th November. But it’s not just old school retailers who are getting a battering. Despite a modest rally yesterday, online retail giant and FAANG-member Amazon has lost over 25% since closing out a record high in early September. So, retailers will be hoping for bumper sales over this weekend. They will also be wishing that the hard-pressed US consumer will put aside worries over rising interest rates and continue to max out their credit cards between now and Christmas. Retail investors also desperately need to hear ringing tills or the sell-off can only accelerate.

What next for crude?

One of the reasons for negative investor sentiment has been the sharp decline in the price of crude oil. Just a few months ago analysts were telling us to prepare for WTI to top $100 going into 2019 citing Iranian sanctions, supply disruptions from Venezuela, Libya and Iraq (amongst others), the OPEC+ production cuts and growing global demand. But just as WTI closed in on $80 per barrel, prices turned sharply lower. One reason was President Trump providing waivers to several key crude consuming countries over US sanctions on Iran. Also, in early October Saudi Arabia and Russia agreed to a private deal to boost output in advance of sanctions which subsequently weren’t applied in full. On top of this, reports show that over the last few months the world’s three largest producers, the US, Russia and Saudi Arabia, have all hit fresh records in terms of crude production. It looks as if this was the trigger for a turn-around in prices.

Slowing demand growth

But the current correction is now in its seventh week in a move that has seen WTI lose close to 30% of its value as of yesterday’s close. So, this isn’t just a supply story but one of demand as well. There were warnings from the IMF last month that it now expects a global economic slowdown, triggered by soaring debt levels and rising trade protectionism. This can already be seen in China’s GDP numbers where the rate of economic growth is slowing.

OPEC meeting

Yesterday the Energy Information Administration (EIA) reported a larger-than-expected build in US crude inventories. The news led to an additional sharp sell-off in the oil price which saw WTI hit its lowest level since early November. The next big event is the OPEC meeting in December. The question now is whether OPEC (together with other non-OPEC producers) reintroduces its output cuts, and if so, by how much? But there will be some annoyance amongst producers that Russia and Saudi came to a bilateral agreement to raise output when the cut agreement was still in place.  

Looking for a catalyst for a turnaround

Markets can get overcooked to the upside as easily as they can overshoot fundamental realities to the downside. When a market falls as far and as fast as crude oil has, technical analysis can fly out of the window. As selling begets more selling, it’s typical for prices to scythe through areas of support as if they weren’t there. So it is with the current sell-off in crude. A quick glance at the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) show that the market is heavily oversold. This is typical for crude oil which is a real traders’ market which often goes from grossly oversold to grossly overbought in the blink of an eye. This is the time when traders look to capitalise on a major move in the expectation of a sharp reversal. But when to jump in? Markets can remain oversold (or overbought) for a very long time. Also, just how reliable are support and resistance levels when they have been broken so violently? Finally, what really caused the change in sentiment in the first place, and have such fears now fully played out?


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