foxex: Double Down Day

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Wednesday, May 06, 2020

1. Stock investors' moment of truth

2. Oil and energy sector still sailing rough seas

3. Oil storage problems may continue

Market Moves

U.S. stock market indexes closed mildly lower today with one exception: the Nasdaq 100 which closed in positive territory. The top stocks (the FAANG stocks plus Microsoft) lifted the index with five out of six of them closing higher today. This narrow rally among those stocks with most others falling suggests that the current market rally may be weakening.

The chart below displays how today's price action created an interesting test for investors. The chart is a simple, equal-weighted portfolio of four ETFs: State Street's S&P 500 index (SPY), Dow Jones Industrial Average (DIA), Invesco's Nasdaq 100 index (QQQ) and iShares' Russell 2000 index (IWM). This chart shows the impact of investors decisions on the most active stocks in the market, so it might be useful to notice a particular signal marked by the red arrows on the chart.

Since the March 23rd lows, today was the fourth instance of two consecutive days that closed lower from the day before. The first three instances were followed by a notable infusion of buyers. If tomorrow's price action does not deliver those buyers, it could signal that the current rally in stocks has possibly reached its end.

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Oil and Energy Sector Still Sailing Rough Seas

The current weakening in the recent intense market rally is nowhere more apparent than in the price action of the energy sector as tracked by State Street's Energy Sector index ETF (XLE). The first chart below shows that the energy sector led all others in rebounding from the March 23rd low point, but has now made a lower peak in its short-term pattern. It is no great surprise just why.

The second chart below shows how the price of oil futures have rebounded somewhat from the disastrous issues surrounding storage shortage. The upcoming contract expiration for this month is less than two weeks away and the CBOE Oil Volatility Index (OVX - blue line on chart) seems to indicate that the storage issues haven't been resolved yet. Those holding futures who plan to take delivery may run into trouble finding a place to put it.

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Oil Storage Problems May Continue

One tactic oil buyers have turned to for storage is to consider putting it on slow-moving tankers that might be able to stand ready once demand for the product reappears. Indeed the chart below seems to indicate that investors had high hopes that such a strategy could make marine shipping companies more profitable.

However the recent seven day slide in prices indicates that things aren't so simple as all that, and that the overproduction in oil may take longer to work through. Chart watchers will take notice that not only has the price slid lower, but the volatility ranges on the chart are expanding above the price and contracting below it--a bearish alignment. If the market were to rebound, investors would expect to see these companies sailing profitably right now. The price action does not lend itself to a bullish market forecast.

The Bottom Line

Stock indexes had a few bright spots but most closed lower on average. The oil and energy markets also weakened. This may be a moment of truth for investors right now. How they respond to these indications going into the weekend may set the stage for the way prices drift over the next two to three weeks.