Oil prices have plummeted 6.9% at the time of writing this to $53.26 per barrel.
WTI crude futures dropped as low as $52.77 per barrel, pressured by supply concerns and some speculation that Saudi Arabia may not curb production now that President Trump has issued a public statement defending the U.S. relationship with Saudi Arabia. The “conspiracy” theory behind this is that behind the curtain the Trump Administration is able to squeeze the house of Saud with a quid pro quo regarding oil prices and the killing.
WTI crude futures are down more than 34% from their October 3 high. Prices for oil and its derivative products factor prominently in the operating budgets of transportation companies, so the sharp drop should presumably be a positive development.
Benchmark Brent crude oil futures fell $2.31 a barrel, or 3.7 percent, to a low of $60.29, its lowest since November 2017. By 1050 GMT, Brent was trading around $60.75, down $1.85.
The latter connection has not resonated in the stock market in any material way thus far. As I type this, the Dow Jones Transportation Average is down 3.0% today, led by weakness in the trucking and railroad stocks,
The shipper, Matson, Inc. (MATX 37.91, -2.90, -7.1%), was downgraded by Stifel to Hold from Buy, and down 12% from the all-time high it hit in September. This has also led to a reconsideration of its peers.
The weakness in the transports, despite falling oil and gas prices, is in part related to the general de-risking that is impacting the broader stock market. However, it does give cause to pause as a vote of weakening confidence in the economic outlook may also be at fault.
The important thing to remember here is that the stocks of companies that move the goods and materials that make an economy go should be doing better than they are if the plunge in crude prices was simply a function of technical selling and price dislocation.
The above distinction is important to recognize should you believe that the price of oil is a benefactor for the overall market/economy. Should you believe that lower oil is a tailwind for higher margins in the shipping/transports this recent beatdown in oil (should) bodes well for the transports sector. The inability for those stocks to catch a bid in light of the failing in oil however suggests that something larger, or more systemic, could be at risk.
The IYT has been in a rising wedge channel since 2006 and has respected the tops and the bottoms of the channel. Recently however, the IYT has put in a double top false breakout after reclaiming the level earlier this year it failed at. The peak in the transports in mid January was an early signal that trouble lay ahead for the overall markets as they soon peaked 10 days later. The same thing has occurred this time around as well as the IYT topped out days before the overall market. Below you see the IYT top out followed by the SPY top out shortly thereafter.
As we see above, the overall market tops were preceded by the IYT topping out just days in advance of the overall market. With this time being no different and with the price of oil getting obliterated not helping the transports catch a bid I find that the IYT will be an important tell for the overall market with respect to finding a bottom.
Secondarily, the lack of enthusiasm and buying in the transports independent of the oil market breakdown signals a sign of caution. I believe that this is the “market trying to tell you something.” Specifically, a lack of investor enthusiasm for the transports as their input costs dwindle suggests to me that investors are worried about overall economic growth concerns at a higher rate than the tailwinds that may benefit the transporters. In simple terms, if the market can’t catch a bid with oil going down, how will they catch a bid once the price of oil stabilizes/goes up? Or, more importantly, how will they go up should the overall market continue to go down?
For now, the lack of buying interest in the face of a large drop in oil and gas prices stands out as a manifestation of concerns about the pace of economic growth ahead.
Update & G20:
With the G20 summit set to kick off imminently and with Jerome Powell to speak on Wednesday afternoon the market appears coiled like a tightly wound spring. Specifically, the IYT is on the verge of a potential breakout as is the tech sector. Below I’ve presented some charts to keep an eye on for a possible breakout.
SHAMLESS PLUG AND POD
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