foxex: Worries Prolong

Chart Advisor | Focus on the Price

Tuesday, March 31, 2020

1. Stocks hit resistance, poised to drop to new lows

2. Oil prices fall as oil producers balance production

3. Oil companies' supply exceeds airlines' demand

Market Moves

Bond and Gold prices fell slightly today, as did the CBOE Volatility Index (VIX). However, stocks seemed to hit resistance as they neared the 38% retracement level on the day's high, and then proceeded to close lower by the end of the session. This sets up an unsettling possibility for those hoping that the worst is behind us.

The chart below maps out the projection of a Fibonacci extension study. This kind of mapping is not intended to be predictive, but merely showing where the price level would go if the downward trend were to continue unabated the way it proceeded so far this year. While option markets do continue to price in the probability that the markets will bottom out on or before April 23rd, the falling VIX measure indicates that option sellers do not expect the markets to fall as far and as fast as they have between now and then.

Oil Prices Fall as Oil Producers Balance Production

The bear market in oil prices was well underway before the COVID-19 outbreak began its exponential spread in China. This fact tends to get obscured by the pandemic headlines, which is too bad for the average investor who may not realize that substantial problems exist in the oil and energy markets right now, making them less safe for investing than typical.

The primary problem, as it usually is in any market, is the disconnect between supply and demand. To be specific, there is a lot more of the latter than the former. Again, this was true before the pandemic. The COVID-19 spread has only made it worse. Much worse.

It will fall to the various oil corporations and oil-producing states who manage production to determine how they will scale back to equalize a lower level of demand for oil. The chart below gives an indication that perhaps, they have begun this effort and are successfully beginning to navigate the conditions they must operate within.

The following chart compares some country-index ETFs for Saudi Arabia (KSA), Russia (RSX), Australia (EWA) and Canada (EWC), with Barclay's S&P GSCI Crude Oil Total Return Index ETN (OIL). From this display it seems clear that although the price of oil is reaching new lows, these countries appear to have begun their rebound.

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Oil Companies' Supply Exceeds Airlines' Demand

The chart below compares an equal-weighted portfolio of Exxon Mobil (XOM), Chevron (CVX), and Conoco-Phillips (COP), with an equal-weighted portfolio of Delta Air Lines (DAL), Continental-United Airlines (UAL), and American Airlines (AAL). What is important to note is that the airlines, which represent consumer demand for energy, seem to be faring significantly worse than big oil companies, which represent the best surrogates for a measure of oil supply. The lows in the markets will probably not show up until this trend is visibly reversed.

The Bottom Line

Traders took profits after the previous few days' buying spree in stocks. Bonds generally held their pace, but commodity prices fell significantly lower. Oil producing countries and corporations seem to be balancing their production to meet demand, though airline companies seem to be struggling to do the same.